What type of capital generally requires a higher rate of return?

Equity capital typically requires a higher rate of return compared to other types of capital because it carries greater risk for investors. When individuals or institutions invest in equity, they are essentially purchasing a share of ownership in a company, which means they are exposed to the company's performance and market fluctuations.

If a company does well, equity investors can benefit from capital appreciation and dividends. However, if the company underperforms, equity holders may not receive returns, or they might even lose their investment entirely. This potential for higher reward needs to compensate for the greater risk involved, leading equity investors to expect higher returns compared to debt holders, who receive fixed interest payments and are prioritized during liquidation.

In contrast, debt has a set repayment structure, providing lenders with predictable returns regardless of the company's operational success or failure, which contributes to a lower required rate of return. Other options like short-term loans and lines of credit are forms of debt and share similar characteristics regarding risk and return expectations.