The Features of Debentures
Like most of the bonds, a debenture might make periodic interest payments known as coupon payments and similar to other kinds of bonds, debentures are recognized in an indenture and it is a binding and legal contract between the bondholders and bond issuers. The contract states the process of interest calculation, the maturity date, the coupon payments, the timing of interest, the process of interest calculation, and much more.
The governments and corporations can issue debentures and commonly, governments issue some long-term bonds and those that have maturities of lengthier than a decade. Again, corporations too can use debentures as a long-term loan. Nonetheless, the debentures that are issued by the corporations tend to be unsecured. Debentures turn beneficial for companies as they carry a low-interest rate besides a long repayment date in comparison to other kinds of debt instruments and loans.
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Kinds of Debenture
- Secured and Unsecured – A secured debenture forms a charge on the companies’ assets and so, it mortgages the company’s assets. On the other hand, the unsecured debenture doesn’t carry any security or charge on the company’s assets.
- Bearer and Registered – A debenture which can be transferred by a mere delivery is known as bearer debenture but a registered debenture happens to be recorded in the debenture holder’s register. And so, a regular instrument is needed for their transfer.
- Convertible and Non-convertible – A convertible debenture can be transformed into an equity share post the expiry of a particular period. But, a non-convertible debenture is that debenture which can’t be transformed into an equity share.
- First and Second – The debenture which gets repaid prior to the other debenture is called the first debenture but the second debenture is viewed as that which is paid post the first debenture has got paid back.
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Benefits of Debentures
- An investor who does wish for a fixed income at a lesser risk opts for the debentures.
- As debentures don’t carry voting rights, so financing through them doesn’t dilute the equity shareholders’ control on management.
- Financing through debentures is less costly in compared to the price of equity capital because the interest payment on a debenture is tax deductible.
- A company refuses to include its profits in debentures.
- The matter of debentures happens to be ideal in a situation when the earnings and sales are comparatively stable.
How Debentures are Different from Bonds
Commonly, debentures hold a more particular purpose in comparison to bonds. Although both are useful for raiding capital, usually, debentures are issued for raising capital to meet the expenditures of the upcoming projects or paying for the planned development in business. Similar to some bonds, a few debentures tend to be convertible and so, they can be changed into company stock, while some tend to be non-convertible.