Bonds and Debentures - New

8/17/2019 Bonds and Debentures - New

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BONDS AND

DEBENTURES


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BONDS


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BONDS

• A bond is an instrument of indebtedness.

• It is a debt security

•Interest is usually payable at xed intervals

• Thus a bond is a form of loan or “I Owe You

IO!"#

• $onds provides external funds to nance lon%&

term investments


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FEATURES OF BONDS

• Principal - 'ominal( principal( par or face

amount

• Maturity - The issuer has to repay the nominal

amount on the maturity date.

• Coupon - The coupon is the interest rate that

the issuer pays to the bond holders.

• Yield - The yield is the rate of return received

from investin% in the bond


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TYPES OF BONDS

! "ERO-COUPON BONDS#

. This is a type of bond that ma)es no coupon

payments but instead is issued at a considerable

discount to par value

. The issue price of *ero +oupon $onds is inversely

related to their maturity period.

. These types of bonds are also )nown as ,eep

,iscount $onds.


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TYPES OF BONDS

$! %&'%-Y&E(D BONDS# - -i%h yield non&investment

%rade" bonds are from issuers that are considered to

be at %reater ris) of not payin% interest andor

returnin% principal at maturity.

)! CORPORATE BONDS# These are issued by lar%e

corporations and have hi%her yields because there is

a hi%her ris) of a company defaultin% as compared

to %overnment bonds.


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TYPES OF BONDS

*! 'O+ERNMENT BONDS# These are the bonds issued by

%overnment in its own currency. They are usually referred

to as ris)&free bonds. $onds issued by national

%overnments in forei%n currencies are referred to as

soverei%n bonds.

,! CON+ERT&B(E BONDS# The holder of a convertible bond

has the option to convert the bond into e/uity. – +onvertible bonds may be fully or partly convertible.


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TYPES OF BONDS

! &NF(AT&ON-&NDE.ED /OR &NF(AT&ON-(&N0ED1 BOND# – It provides protection a%ainst in0ation( and is desi%ned

to cut out the in0ation ris) of an investment.

2! E.TEND&B(E AND RETRACTAB(E BONDS# – 1xtendible and 2etractable bonds have no xed

maturity date.

– The maturity period of extendible bonds can beextended on the demand of the buyer of these bonds

– The maturity period of retractable bond can bereduced and the principal amount returned to thebuyer if he feels so.


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TYPES OF BONDS

3. 4loatin% 2ate $onds5 4loatin% 2ate 'otes are

bonds in which interest rate depends on the

interest rate prevailin% in the mar)et.

6. 7erpetual $onds5 7erpetual $onds( which are

also )nown as the name of +onsol( are the bonds

which have no maturity period and )eep onpayin% interest to the investors re%ularly.


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DEBENTURES


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DEBENTURES

• A debenture is a document that either creates adebt or ac)nowled%es it( and it is a debt withoutcollateral.

• The term is used for a medium & to lon% & term

debt instrument used by lar%e companies to borrowmoney.

• In some countries the term is used interchan%eablywith bond( loan 3toc4 or note.

• A debenture 8 +erticate of loan or a loan bond• ,ebentures are %enerally freely transferable by the

debenture holder.

• The interest paid to them is a char%e a%ainst prot in

the company9s nancial statements!


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FEATURES OFDEBENTURES

:. ,ebenture holders of the company are the creditors of the

company and not the owners of the company.

;. +apital raised by way of debentures is re/uired to be

repaid durin% the life time of the company or at the time

stipulated by the company. Thus( it is not a source of

permanent capital.


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FEATURES OFDEBENTURES

=. ,ebentures are very ris)y from company>s point of view

for raisin% lon% term funds.

?. 2is) on the part of debenture holders is very less.

@. ,ebenture holders do not carry any votin% ri%hts.

3. ,ebentures are a cheap source of funds from the

company>s point of view.


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TYPES OF DEBENTURES

1 SECUR&TY

– ecured Bort%a%e

– !nsecured

$1 REDEMPT&ON – 2edeemable

– Irredeemable

)1 RECORDS

– 2e%istered

– $earer


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TYPES OF DEBENTURES

*1 CON+ERT&B&(&TY

– +onvertible

– 'on&convertible

,1 PR&OR&TY

– 4irst

– econd


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D&FFERENCEBET5EEN

BONDS ANDDEBENTURES


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&N BR&EF

• $onds are more secure than debentures( but the rateof interest is lower

• ,ebentures are unsecured loans but carries a hi%herrate of interest

• In ban)ruptcy( bondholders are paid rst( but liabilitytowards debenture holders is less

• ,ebenture holders %et periodical interest

• $ond holders receive accrued payment upon

completion of the term• $onds are more secure as they are mostly issued by

%overnment rms


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AD+ANTA'ESAND

D&SAD+ANTA'E

S OF BONDSAND

DEBENTURES


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AD+ANTA'ES OFDEBENTURES6BONDS

• Investors consider debenturesbonds as a relativelyless ris)y investment

• Interest payments are tax deductible.

• 4loatation +ost

• 'o votin% ri%hts therefore no dilution of ownership.

• ,ebenturebond holders do not participate inextraordinary earnin%s of the company. Thus theirpayments are limited to interest.

• ,urin% periods of hi%h in0ation( debenturebond issuebenets the company. Its obli%ations of payin%interest and principal( which remain xed( decline inreal terms.


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D&SAD+ANTA'ES OFDEBENTURES6BONDS

• 2esults in le%al obli%ation of payin% interest and

principal

• Increases the rm9s nancial levera%e

• Bust be paid at maturity

• +ontains restrictive covenants

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Bonds and Debentures - New