Debentures and Bonds

8/12/2019 Debentures and Bonds

1/14


2/14


3/14

SOURCES OF RAISING FINANCE

According to

period According toownership According to sourceof Generation

I. Long Term

Sources

II. Medium

Term

Sources

Short Term

Sources

I. Owners

Capital

II. Borrowe

d Capitalsuch as

Debentu

res,

Public

deposits,

Loans

I. Internal Source

eg.Retained

Earnings and

depreciation

Funds

II. External Sources

eg Debentures

Loans etc.


4/14

A debenture is a written instrumentacknowledging a debt and containing provisions as

regards the repayment of principal and the

payment of interest at a fixed rate.


5/14

According to section 2(12) of The companies

Act,1956,debenture

includes,debentures,stock,bonds and any

other securities of a company whether

constituting a charge on the asset of thecompany or not. Debenture represent a debt.

The person who contribute money through

debentures are called debenture holders.


6/14


7/14

Registered Debentures:

The name of such debenture holders arefound in the register of debenture holders of thecompany. In other words interest is payable or therepayment of debenture is made that personwhose name is registered in the books of the

company. Secured debentures:

When debenture are secured by a charge on theasset of the company, they are known as secureddebentures. The charge may be fixed.

Unsecured Debentures:When debentures are issued without any

security in respect of interest or the repayment ofthe principal they are known as unsecureddebentures.


8/14

Redeemable debentures:

Redeemable Debentures are those whichare redeemed either at a discount after the expiration ofthe specified period.

Irredeemable Debentures:Irredeemable debentures are those which are

not redeemable during the lifetime of the company.

Convertible Debentures:These are debentures which give an option to

the debenture holders to convert them into preference orequity shares at a stated rate of exchange.

Non-convertible debentures:These debentures are those which do not have a right to

convert the into shares.


9/14

Since debentureholders have no voting right.

Debentures help to provide flexible capital

structure.

The company can enjoy tax benefit by issuingdebentures as the interest paid can be

deducted from the profit of the company.

Debentureholders have safe investment as

they have a fixed and regular income.


10/14

Creditors like debentures as they prefer safety

for their investment.

The issue of debentures may not be possible

on account of inadequacy of assets to beoffered as security.

Debentureholders do not have any voting

rights in the company.


11/14

Bond is a form loan ,the holderof the bond is the

lender (creditor), the issuerof the bond is theborrower (debtor), and the couponis the

interest. Bonds provide the borrower with

external funds to finance long-term investments

or, in the case of government bond to financecurrent expenditure. Certificates of deposit

(CDs) or short term Commercial paper are

considered to be

money market instruments and not bonds.

Bonds are issued by public authorities, credit

institutions and companies .


12/14

fixed rate bondIt is a long term debt paper that carries a predetermined

interest rate. The interest rate is known as coupon rateband interest is payable at specified dates before bondmaturity. Due to the fixed coupon, the market value of a

fixed-rate bond is susceptible to fluctuations in interestrates, and therefore has a significant amount of interestrate risk.

Government BondThese are also called Treasury bond, is issued by a national

government and is not exposed to default risk. It ischaracterized as the safest bond, with the lowest interestrate. A treasury bond is backed by the full faith and creditof the relevant government


13/14

Bearer BondThis is an official certificate issued without a named holder. In

other words, the person who has the paper certificate can

claim the value of the bond. Often they are registered by a

number to prevent counterfeiting, but may be traded like cash.

Bearer bonds are very risky because they can be lost or stolen.

Especially after federal income tax began in the United States,bearer bonds were seen as an opportunity to conceal income

or assets. U.S. corporations stopped issuing bearer bonds in

the 1960s, the U.S. Treasury stopped in1982 and state and

local tax-exempt bearer bonds were prohibited in 1983.

Registered bondIt is a bond whose ownership (and any subsequent

purchaser) is recorded by the issuer, or by a transfer agent.. It

is the alternative to a bearer bond. Interest payments, and the

principal upon maturity, are sent to the registered owner.


14/14

Documents

Debentures and Bonds