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A debenture is a non-collateralized debt instrument with a period of more than ten years. Only the issuer’s creditworthiness and reputation are used to back debentures. Debentures are regularly issued by firms and governments to raise revenue or capital.
Features of debentures
The following are common characteristics of a debenture:
1. Debentures are nothing more than a collection of papers. To put it another way, they’re historic.
2. These documents show that you owe money to someone. This demonstrates that the corporation owes the debenture holder money.
3. Debentures provide a fixed rate of interest. In addition, regardless of whether the company produces profits or not, it must pay interest.
4. The company has the option of repaying the debt or converting the debenture into stock or another debenture.
5. A charge on the company’s assets may or may not be included in debentures. Finally, most debentures can be transferred. Holders of debentures can sell them at any time on stock exchanges.
Importance of debentures
Debenture issues play a significant role in long-term planning and decision-making.
Debentures are a type of debt financing that is best suited for businesses with a steady stream of revenue to service the loan. In today’s competitive business world, any company requires capital to pursue any business opportunity.
Debentures suit corporations with regular earnings to service the debt, as well as a bigger share of fixed assets in their asset structure, which provides appropriate security and stimulates investors.
Debenture holders or loan capital providers do not have a controlling interest in the company.
Debentures are necessary for paying fixed-rate interest expenses.
Finance is accessible for a specific length of time with certainty, allowing the company to alter its investment plans appropriately based on the available finances.
Debentures are necessary to address long-term capital budgeting requirements.
Through the use of financial leverage, debentures increase equity holders’ earnings.
Debenture holders
A person or company that has used a debenture to lend money to another person or company:
Interest is paid to the holder of a debenture at a certain rate and at predetermined intervals. Debentures are normally transferable by the holder of the debenture.
In a limited company, the mortgagee is in the same position as the debenture holder. Although the debenture holder has a legitimate stake in the property, he is free to leave. Every debenture holder had a secured interest as well as a potential stake in the equity and could convert it into ordinary shares. The only distinction between a debenture holder and a preferred stockholder is one of security.
Bearer debentures
Bearer debentures are debentures that can be transferred by delivery and for which the corporation keeps no record of the holders. The individual who delivers the interest coupon connected to debentures receives the interest.
Features of bearer debentures
Bearer debentures are sometimes known as unregistered debentures because they can be transferred simply by delivery.
Bearer Debenture records are not kept in the debenture holders’ registry, and transfer registration is not required.
Bearer debentures are issued in physical form, which means that they are printed on paper.
Receives Interest Payments by Coupon-In order to collect interest payments, the holder of a Bearer Debenture must deliver to the bank or issuing corporation the interest payment coupons that are physically attached to the security.
Bearer Debentures can be redeemed within 30 days of the bond’s printed maturity date.
No Third Party is Involved in the Sale-Selling Bearer Debentures is relatively easier because there is no need for a third party or middleman. As a result, it can be easily transferred by just handing over the certificate to the recipient.
Risks Involved In Bearer Debentures
1- Bearer Debentures are not recorded by the issuing business, which poses a significant risk when purchasing these instruments. As a result, if a debenture is lost or stolen, it cannot be replaced. Because the owner of bearer debentures can be changed by simple delivery, the person holding the bearer debenture will be deemed the owner.
2- No obligation in the event of an interest rate increase-In the event of an interest rate increase, the issuing business can call back the bearer debentures at any moment because it is under no obligation.
3- The risk of losing the interest payment coupons if the debentures are detached and sent through the mail is a major risk factor linked with redeeming the Debentures. As a result, the bond must be surrendered in person to a bank for redemption at maturity.
4- It is practically impossible to receive the principal and interest payments if the holder of a Bearer’s debenture dies before the maturity date.
Conclusion
Debentures are one of the most prevalent financial instruments used by companies to raise financing for their operations. A debenture is a bond issued by a firm under its seal that acknowledges a debt and has provisions for principal and interest repayment.
