lesson 2

• Debentures are a type of unsecured debt instrument backed by the company's creditworthiness and reputation, not by physical assets or collateral
• Debentures are usually long-term debt instruments issued by governments and companies to raise funding
• An agreement called an indenture documents debentures, specifying details like interest rate, maturity date, and convertibility
• In the acquisition process of debentures, the company or government issues a debenture, and an investor lends funds in return for interest rate payments and the return of the borrowed money at maturity
• Debentures can be held until maturity or sold on the stock exchange; they can also be converted into shares at a pre-specified date
• Types of debentures include:

  • Convertible debentures: can convert into equity shares after a specific period
  • Non-convertible debentures: cannot be converted into equity
  • Redeemable debentures: have a specific redemption date
  • Irredeemable debentures: have no specific redemption date
• Fully convertible debentures allow the whole value to convert into equity shares, while partly convertible debentures only allow a portion to convert
• Secured debentures are backed by assets, while unsecured debentures rely solely on the issuer's credibility
• Fixed rate debentures have a fixed interest rate, while floating rate debentures have an interest rate dependent on a benchmark rate
• Benefits of debentures include higher financial return rates, transferability, and lower cost of debt compared to equity or preference shares
• Advantages of debentures:

  • Higher position in repayment hierarchy
  • Financial protection for directors
  • Encouragement of long-term funding
  • Fixed rate of interest for lenders
• Disadvantages of debentures:

  • Obligation to make interest payments can limit flexibility
  • Restrictions imposed by securing assets can limit management's freedom
• Debentures carry risks like interest rate risk, credit/default risk, and liquidity risk
• Debentures are a type of unsecured debt instrument, backed only by the company’s creditworthiness and reputation, not by physical assets or collateral
• Debentures are usually long-term debt instruments issued by governments and companies to raise funding
• An agreement called an indenture documents debentures, specifying details like interest rate, maturity date, and convertibility
• In the acquisition process of debentures, the company or government issues a debenture, and an investor lends funds in return for interest rate payments and the return of the borrowed money at maturity
• Debentures can be held until maturity or sold on the stock exchange; they can also be converted into shares at a pre-specified date
• Types of debentures include:

  • Convertible debentures: can convert into equity shares after a specific period
  • Non-convertible debentures: cannot be converted into equity, offering a higher interest rate
  • Redeemable debentures: have a specific redemption date
  • Irredeemable debentures: have no specific redemption date, redeemed on liquidation or by the company's choice
• Fully convertible debentures allow the whole value to convert into equity shares, while partly convertible debentures only allow a portion to convert
• Secured debentures are backed by assets, while unsecured debentures rely solely on the issuer's credibility
• Fixed rate debentures have a fixed interest rate, while floating rate debentures have an interest rate dependent on a benchmark rate like LIBOR
• Benefits of debentures include higher financial return rates, transferability, and lower cost of debt compared to equity or preference shares
• Advantages of debentures:

  • Ensure a higher position in repayment hierarchy
  • Provide financial protection for directors
  • Encourage long-term funding and cost-effective lending
  • Offer a fixed rate of interest before dividends to shareholders
• Disadvantages of debentures:

  • Lack of flexibility in interest payments can hinder business growth
  • Restrictions from securing assets limit management's control over assets
• Risk and return of debentures:

  • Unsecured debentures carry more risk and should provide a higher rate of return
• Risks of debentures include interest rate risk, credit/default risk, and liquidity risk