They are simply financial instruments used to issue loans by businesses and the government. Debentures are a type of short-term funding used by private enterprises to fund prospective projects, develop their business, or raise cash. The interest rate on a Debenture might be fixed or floating.
Here are some of the most important features of debentures:
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A company has the authority to issue several sorts of debentures, depending on its needs and objectives. Some of the types are as follows:
Secured debentures are the ones in which a charge is placed on the company's current properties or assets for the purpose of making a payment. The charge can be either floating or fixed.
Convertible debentures are financial instruments that, at the company's or the debenture holders' discretion, can be changed into equity shares or any other security. These debentures might be fully convertible or partially convertible.
On the other hand, non-convertible debentures are those that cannot be converted into shares or other securities. This category includes the majority of debentures issued by businesses.
Redeemable debentures are those that are due at the end of the time period, either in one lump-sum payment or in instalments during the life of the business. These can be redeemed at a discount or at Face Value.
Non-Redeemable debentures are also known as Perpetual Debentures since the company does not make any attempt to recoup the money it has obtained or borrowed by issuing them. These debentures are repayable upon the closure of a business or the end of a protracted-time period.
A registered debenture is one that gets included in the company's register of debenture holders. Its transmission necessitates performing a normal transfer deed. Bearer debentures, on the other hand, are debentures that can be transferred simply by delivery.
The coupon rate on specific coupon rate debentures is fixed. The interest rate of zero-coupon rate debentures is usually not specified. Such debentures are circulated at a significant discount to recover investors. The difference between the nominal value and the circulating price is considered the amount of interest associated with the debentures' tenure.
Let's look at the main differences between debentures and shares based on the following criteria:
|Meaning||Debentures are loans, and the company records them as debt||Shares are a pillar of a company's capital, and issuing them serves to boost its market capitalization|
|Holder's known as||Debenture holder||shareholder|
|Mode of return||Interest||Dividend|
|Payment of return||Regardless of whether the firm has made a profit, the interest amount is paid to the debenture holders||Dividends are paid out of a company's Earnings to its shareholders|
Let's look at the main differences between debentures and Bonds based on the following criteria:
|Meaning||Debentures are debt financial instruments issued by private firms that are not backed by any collateral or real assets||Bonds are debt financial securities backed by collateral or physical assets that are issued by big enterprises, financial institutions, and government bodies|
|Secured by Collateral||Can be either secured or unsecured||Secured|
|Interest||Offers high-interest rate||Offers low-interest rate|
|Issued by||Private companies||The financial institutions, organizations, government agencies, etc|
|Risk||High risk||Low risk|
|Tenure||Medium-short term investments, tenure is generally lower than bonds||Long-term investments|
|Priority at Liquidation||Second priority||First priority|
|Payments||It depends on the company's performance in the market||It can be made monthly or annually|
A debenture is a secure investment from the investor's perspective. Whether the firm earns a profit or loses money, the company is compelled to pay interest at maturity. Debentures are regarded as great instruments for obtaining guaranteed returns since the rate of return is set.
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