Debentures and types PDF

# Real Estate and Other Investment Alternatives ## Debentures Debentures are long-term debt instruments issued by corporations, governments, or other entities to raise capital. When an investor buys a debenture, they are essentially lending money to the issuer in exchange for regular interest paym...

# Real Estate and Other Investment Alternatives ## Debentures Debentures are long-term debt instruments issued by corporations, governments, or other entities to raise capital. When an investor buys a debenture, they are essentially lending money to the issuer in exchange for regular interest payments and the promise of repayment at maturity. Debentures are a popular investment option for those seeking fixed-income securities with potentially higher yields than traditional savings accounts. ### Features of Debt Instruments - Borrowed Capital: Bonds or Debts represent a type of borrowed capital and a variety of loan for the issuing company. Therefore, the holder of such security is like a creditor for the issuing company and is entitled to receive payments of principal amount and interest charges which are pre-determined. - Fixed interest charges/ Coupon rate of interest: Coupon refers to the periodic interest payments that are to be made by the borrower (the issuing company) to the lender (the holder of the bond). Coupon rate is the rate at which interest is paid, and is usually represented as a percentage of the face value of a bond. - Maturity term: Maturity of a bond refers to the date, on which the debt instrument matures. This date is determined by the borrower to repay the principal. Term-to-Maturity refers to the number of years remaining for the bond to mature. The Term-to-Maturity changes everyday, from date of issue of the bond until its maturity. The term to maturity of a bond can be calculated on any date, as the distance between such a date and the date of maturity. It is also called the term or the tenure of the bond. - Economical to issuing authority: Debt instruments are economical to the issuing organization in comparison to equity/ ownership instruments. The borrower can entertain the tax benefits which are available on debt instruments by showing the interest charges as expenses in debit side of profit and loss account, which makes these instruments economical. - Trading on equity: When a company incurs new debt to acquire assets on which it can earn a greater return than the interest cost of the debt, the situation is called trading on equity. These debt instruments give the opportunity to the companies to trade on equity, but the greater return on investment should be ensured. - Priority on liquidation: At the time of winding up of the company, the final payments to all the debenture holders had been made in prior to equity and preference shareholders as they do have floating charge on assets of the company. ## Types of Debentures - Secured Debentures: These debentures are backed by specific assets of the issuing company. If the company faces financial trouble and can't repay the debentures, these assets can be sold to repay the debenture holders. This type offers more security to investors. - Unsecured Debentures (Debentures in Perpetuity): Unsecured debentures, also known as naked debentures, are not backed by any specific collateral. If the company defaults, the debenture holders have a claim on the company's general assets but not on any specific property. These carry more risk compared to secured debentures. - Convertible Debentures: Convertible debentures can be converted into shares of the issuing company after a certain period. This allows debenture holders to become shareholders and potentially benefit from any increase in the company's stock value. They offer a chance for capital appreciation along with regular interest payments. - Non-Convertible Debentures: These debentures cannot be converted into shares. They provide fixed interest payments to investors throughout their tenure and are suitable for those looking for stable income. - Callable Debentures: Callable debentures can be redeemed by the issuing company before their maturity date. This gives the company the flexibility to repay the debt early, which can be advantageous for them if interest rates fall. However, it can be less favorable for investors as they might need to reinvest their funds at potentially lower rates. - Non-Callable Debentures: Non-callable debentures cannot be redeemed by the issuing company before maturity. This offers more stability to investors, knowing that their investment won't be called back unexpectedly. - Floating Rate Debentures: These debentures have an interest rate that adjusts periodically based on a benchmark, like a government bond's yield or a reference interest rate. This helps investors cope with changes in interest rates and inflation. - Fixed Rate Debentures: Fixed rate debentures offer a consistent interest rate throughout their tenure. This can provide predictability for investors who want a stable income stream. - Subordinated Debentures: In case of liquidation or bankruptcy, subordinated debentures have lower priority for repayment compared to other forms of debt. This means that other debt obligations, like senior secured loans, will be repaid first. - Perpetual Debentures: These debentures have no fixed maturity date and are treated as if they will never be repaid. However, the company may have the option to redeem them under certain conditions.