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Types of Debentures

ADVERTISEMENTS:

Everything you need to know about the types of debentures. Debentures are the most popular form of debt capital.

Basically, a debenture represents a superior and refined form of the age-old promissory note. Debentures are raised for long-term capital needs.

As in the case of any debt, the debentures have two fundamental features of periodic payment of interest and repayment at a specified point of time.

ADVERTISEMENTS:

Debentures include debenture stock, bonds and any other securities of a company whether constituting a charge on the assets of a company or not.

This is a debt instrument and is the commonest method of raising loan capital, as part of project financing.

A debenture is a kind of document acknowledging the money borrowed containing the terms and conditions of the loan, payment of interest, redemption of the loan, the security offered (if any) by the company.

Debentures may be classified on the basis of:-

ADVERTISEMENTS:

1. Security 2. Registration or Records 3. Repayment or Redemption 4. Status 5. Rank or Priority 6. Conversion 7. Coupon Rate Point of View.

Some of the types of debentures are:-

1. Registered Debentures 2. Bearer Debentures 3. Redeemable Debentures 4. Perpetual or Irredeemable Debentures 5. Secured or Mortgage Debentures 6. Unsecured or Naked Debentures 7. Collateral Debentures 8. Convertible Debentures 9. Non-Convertible Debentures 10. Unregistered Debentures.


Types of Debentures: 7 Major Types of Debentures

Types of Debentures –  Registered Debentures, Bearer Debentures, Redeemable Debentures, Perpetual or Irredeemable Debentures, Secured Debentures and a Few Others

Debentures may be of the following kinds:

ADVERTISEMENTS:

i. Registered Debentures:

These are debentures which are payable to the registered holders i.e., persons whose names appear in the Register of Debenture holders. Such debentures are transferable in the same way as shares.

ii. Bearer Debentures:

Bearer debentures are similar to share warrants in that they too are negotiable instruments, transferable by delivery. The interest on bearer debentures is paid by means of attached coupons. On maturity, the principal sum is paid to the bearers.

iii. Redeemable Debentures:

These debentures are issued for a specified period of time. On the expiry of that specified time the company has the right to pay back the debenture holders and have its properties released from the mortgage or charge. Generally, debentures are redeemable.

iv. Perpetual or Irredeemable Debentures:

A debenture which contains no clause as to payment or which contains a clause that it shall not be paid back is called a ‘perpetual debenture’ or ‘irredeemable debenture’. These debentures are redeemable only on the happening of a contingency or on the expiration of a period, however long. It follows that debentures can be made perpetual, i.e., the loan is repayable only on winding up or after a long period of time.

v. Secured Debentures:

ADVERTISEMENTS:

When any particular or specified property of the company is offered as security to the debenture-holders and when the company can deal with it only subject to the prior right of the deben­ture-holders, fixed charge is said to have been created.

On the other hand, when the debenture-holders have a charge on the undertaking of the company i.e., on the whole of the property of the company, both present and future, and when it can deal with the property in the ordinary course of business until the charge crystallizes i.e., when the company goes into liquidation or when a receiver is appointed, the charge is said to be a floating charge.

When the floating charge crystallizes, the debenture-holders have a right to be paid out of the sale proceeds of the assets subject to the right of the preferential creditor but prior to making any payment to unsecured creditors.

vi. Naked Debentures:

ADVERTISEMENTS:

Normally debentures are secured by a mortgage or a charge on the company’s assets. However debentures may be issued without any charge on the assets of the company. Such debenture is called ‘naked debenture’ or ‘unsecured debenture’. They are mere acknowledgment of a debt due from the company, creating no rights beyond those of unsecured creditors.

vii. Debentures Issued as Collateral Security for a Loan:

The term collateral security or secondary security means, a security which can be realized by the party holding it in the event of the loan being not paid at the proper time or according to the agreement of the parties. At times, the lenders of money are given debentures as a collateral security for loan. The nominal value of such debentures is always more than the loan. In case the loan is repaid, the debentures issued as collateral security are automatically redeemed.


Types of Debentures – On the Basis of the Terms and Conditions of Issue 

Debentures can be classified into different types on the basis of the terms and conditions of issue:

ADVERTISEMENTS:

1. As Regards Security:

i. Naked, unsecured or simple debentures are issued with merely a promise of payment, without any security by way of charge on the assets of the company for the payment of interest or capital;

ii. Secured or mortgage debentures are those debentures which are issued with a charge on the undertaking and assets of the company as security. The charge may be fixed, i.e., on a particular asset, or it may be floating, when it does not fasten on any asset until it crystallises.

2. As Regards Registration or Records:

ADVERTISEMENTS:

i. Registered debentures are payable to a holder whose name, address and particulars of the holdings are entered in the register of debenture-holders maintained by the company. They can be transferred by a regular transfer deed and the transfer must be registered with the company;

ii. Bearer debentures are payable to the bearer and are transferable by mere delivery. They are negotiable instruments, and the company keeps no records in respect of them. Interest coupons are attached to them and interest is paid to a person who produces the coupons.

3. As Regards Repayment or Redemption:

i. Redeemable debentures are those the repayment of the principal by the company on which is to be made on a specified date, or by instalments either at company’s option or at fixed intervals as long as the company is a going concern;

ii. Irredeemable debentures or perpetual debentures are those in respect of which no time is fixed in which the company is bound to pay, although it may pay back at any time it chooses. The debenture-holders cannot demand payment as long as the conn any is a going concern and does not make default in payment of interest. But all debentures, whether redeemable or irredeemable, become payable on the company going into liquidation.

4. As Regards Status:

i. Equitable debentures are those which are secured by deposit of little deeds of the property with a memorandum in writing creating a charge;

ii. Legal debentures are those in which the legal ownership of the property of the company is transferred by a deed to the debenture-holders as security for the loans.

5. As Regards Rank or Priority:

i. Preferred or First debentures are those which are, in the event of winding up of the company, paid first.

ii. Ordinary or Second debentures are paid after the preferred, or first debentures have been redeemed.

6. As to Conversion:

i. Convertible debentures are those in which an option is given to the debenture-holders to exchange their debentures for shares in the company under certain conditions and limitations imposed regarding the period during which the option may be exercised;

ii. Non-convertible debentures cannot be exchanged for shares, and the debenture-holder cannot change his status to a shareholder.

Merits of Debenture Issue:

Debentures as the source of capital have many advantages. From the point of view of the investors, they offer a definite security and so appeal to the cautious investors. For example, a mortgage debenture-holder knows exactly what his security is, and generally, there are trustees to protect his interest. The better the security, the greater will be the chance of successful debenture issue.

The debentures of sound and stable concerns are good investment from the point of view of the class of investors who do not want to risk their savings too much and yet wish to earn an income higher than what can be earned on gilt-edged or Government securities. Regular fixed rate of interest payable by the company to the debenture-holders even out of capital if profits are not available adds to the merits of debentures.

From the Point of View of the Company:

i. Debentures enable the company to raise finance without giving any control to the debenture holders,

ii. The rate of interest payable on them is fixed, as well as lower than the rates of dividend paid on shares;

iii. Debentures being issued for a fairly long period, there is a certainty of finance for that specific period and the company is in a position to adjust its financial plan accordingly;

iv. The company is able to trade on equity, and conse­quently pay better rates of dividend to equity shareholders.


Types of Debentures – Bearer and Registered Debentures, Redeemable and Irredeemable Debentures, Convertible and Non-Convertible Debentures and a Few Others

Debentures are of many types. They can be classified on various grounds.

The main types of debentures are:

(1) Bearer and Registered Debentures:

Bearer debentures are those debentures which can be transferred by mere delivery. Interest on such debentures is paid with the help of coupons attached with the debentures. The holder of debentures can get the payment by presenting these coupons to the bank.

Contrarily, if the debentures can be transferred by prior information to the office of the company, such debentures are called registered debentures. Under it, principal and interest can be paid to that holder whose name is registered in the office of the company.

(2) Redeemable and Irredeemable Debentures:

If the amount of debentures is to be repaid after a specific period of time, such debentures are called redeemable debentures. On the other hand, irredeemable debentures can be redeemed at the option of the company. Debenture holders can’t force the company to redeem these debentures. Such debentures are redeemed at the time of liquidation of company. In India, such debentures can’t be issued.

(3) Convertible and Non-Convertible Debentures:

If the debenture holders of a company have the option to convert their debentures into equity shares after a fixed period and at a fixed price, such debentures are called convertible debentures. If the debenture holders do not have this option, the debentures will be called non-convertible debentures.

(4) Secured and Unsecured Debentures:

When at the time of issue of debentures the assets of company are mortgaged in favour of debenture holders, such debentures are known as secured debentures. The charge on assets of company is of two types – (i) Fixed charge (ii) Floating charge. Floating charge is not created on specific assets and the company can transact the assets of the company ordinarily.

Unless this charge becomes fixed, company can purchase or sell the assets. At the time of liquidation or on the appointment of liquidator by the debenture holders, the charge becomes fixed. Under the floating change, at the time of liquidation, the debenture holders get the right of payment after paying the preferential creditors but before payment to unsecured creditors.

Fixed charge is made on a specific asset and the company cannot sell or transfer such asset. But such asset can be used in the operation of business. At the time of liquidation, the claims of debenture holders can be settled by selling these assets. On the other hand, if at the time of issue of debentures no fixed or floating charge is created, debentures are called unsecured.


Types of Debentures – Registered Debentures, Unregistered Debentures, Unsecured Debentures, Secured Debentures, Redeemable Debentures and a Few Others

The debentures are of the following types:

i) Registered debentures

ii) Unregistered debentures

iii) Unsecured debentures

iv) Secured debentures

v) Redeemable debentures

vi) irredeemable debentures

vii) Convertible debentures

viii) Non Convertible Debenture

i) Registered Debentures:

They are those debentures in respect of which the names and addresses of the debenture holders and the particulars of the debentures held by them are entered in register of debenture holders maintained by the company. As such, the payment of interest and the repayment of these debentures are made only to the persons whose names are recorded in the register of the company.

These debentures are not negotiable instruments. So, they cannot be transferred by mere delivery or by endorsement and delivery. They can be transferred only through the execution of proper instrument of transfer.

ii) Unregistered Debentures:

They are those debentures in respect of which the names and the addresses of debentures holders and the particulars of the debentures held by them are not entered in the register of debentures holders maintained by the company. As such, the payment of interest and the repayment of these debentures are made to the bearers or the holders of the debentures. These debentures are negotiable instruments. So, they can be transferred by mere delivery.

iii) Secured Debentures:

They are debentures which are secured by a charge on the assets of the company. The charge on the assets of the company may be fixed charge or a floating charge. If the charge is on some specified assets of the company it is called a fixed charge. On the other hand, if the charge is not on any particular asset of the company but on the assets in general, it is called floating charge.

iv) Unsecured Debentures:

They are debentures which are not secured by any assets of the company irrespective of the interest or principal. In the case of these debentures, the company does not offer any security to the holders either in respect of the payment of interest or repayment of the loan, so the holders of these debentures are just the ordinary or unsecured creditors of the company.

v) Redeemable Debentures:

They are those which are repayable in a lump sum at the end of a specified period or in installment during the existence of the company.

vi) Irredeemable Debenture:

The term “irredeemable debentures” does not mean that these debentures are not to be repaid. It only means that there is no fixed time for the repayment of these debentures. As such, ordinarily these debentures are not repaid during the existence of the company. They are repaid only when the company goes into liquidation.

vii) Convertible Debentures:

They are those, the holders of which are given an option to exchange the whole or a part of the amount of their debentures for share after a specified period.

viii) Non-Convertible Debentures:

They are those, the holders of which have no right to convert them into equity shares.


Types of Debentures – On the Basis of Security Given, Registration, Conversion, Priority in Payment and Redemption

1. On the Basis of Security Given:

i. Secured or Mortgage debentures – The company’s assets are given as charge for the debentures. The charge may be either specific charge or floating charge.

Under specific charge certain specified assets of the company are given as charge to debentures. Under floating charge, the entire assets of the company are given as charge to the debentures.

ii. Unsecured or Naked debentures – These debentures are issued without any charge on the assets of the company.

2. On the Basis of Registration:

i. Registered debentures – The details of debenture holders, the number of debentures held by each debenture holder is entered in the debenture ledger maintained by the company. The debentures are transferable by execution of a transfer deed.

ii. Bearer debentures – The Company does not maintain any records of the names and addresses of persons holding such debentures. These debentures are payable to bearer and transferable like a negotiable instrument by mere delivery. In such a case interest coupons are attached to each individual debenture. The interest and the principal amount on such a debenture is payable upon presentation and delivery of the coupons and debentures.

3. On the Basis of Conversion:

i. Convertible debentures – Debentures may be convertible into equity or preference shares of the company on certain dates or during certain periods on the basis of an agreement between the company and debenture-holders. Sometimes debenture holders are given an option to convert their debentures into shares. These may be fully convertible or partly convertible into shares.

ii. Non-Convertible debentures – Such debentures are not convertible into shares. The debentures are redeemed after the expiry of specified period.

4. On the Basis of Priority in Payment:

i. First debentures – First debentures are those which are paid in priority over other debentures.

ii. Second debentures – Second debentures are those which are paid after the redemption of first debentures.

5. On the Basis of Redemption:

i. Redeemable debentures – Redeemable debentures are redeemed after the expiry of certain agreed period in one lump sum or in installments over a period or at the option of the company.

ii. Irredeemable debentures or perpetual debentures – The debenture holders of irredeemable debentures have right to receive interest from the company, during its life time. These debentures are redeemed only at the time of winding up of the company.


Types of Debentures – Classified on the Basis of Security, Convertibility, Records, Repayment and Priority

The following are the different types of debentures issued by the company.

These are classified on different basis:

1. On the Basis of Security:

The debentures are classified on the basis of security, as secured and unsecured.

a. Secured debentures are secured by a charge upon some or all assets of the company. These charges may be fixed or floating. If the charge is fixed the assets cannot be sold without the consent of the debenture-holders. If the charge is floating the company is free to deal with the assets charged but as and when the debenture holders exercise the control, the charge gets crystallised and the company cannot deal with these assets.

b. Unsecured Debentures have no security for their repayment. They are not secured against any charge on the assets of the company. They are also called as naked debentures.

2. On the Basis of Convertibility:

The debentures may either be convertible or non-convertible:

a. Convertible Debentures:

The convertible debentures require no such security. They can further be either fully convertible debentures (FCD) or partly convertible debentures (PCD). Fully convertible debentures are redeemed by issuing equity or preference shares, instead of making any payment. This ratio is pre-determined. In case of partly convertible debentures, the debenture-holders are paid for a fixed part and for the balance part of the debenture, (the convertible part) they are issued equity or preference shares.

b. Non-Convertible Debentures:

If debentures are non-convertible, they are paid at the time of redemption. Debentures which are non-convertible and redeemable after a period of more than 18 months must be secured by creating a charge against the property of the company.

3. On the Basis of Records:

The debentures can either be registered or bearer debentures as per this classification:

a. Bearer debentures mean that no records are maintained by the company as to who is the debenture-holder. Only on the basis of coupons attached, the debentures are paid interest at regular periods, on the presentation of these coupons and similarly, they are paid at the time of redemption. Bearer debentures are easy to transfer and they get transferred by mere delivery.

b. Registered debentures holders are those whose name appears in the debentures ledger maintained by the company. They are transferred only after a transfer deed is executed in the favour of the transferee. The company regularly pays interest to such debenture-holders and at the time of redemption, they get their money back.

4. On the Basis of Repayment:

The debentures can either be redeemable or irredeemable:

a. Redeemable debentures are repaid during the life of the company as per the terms of the issue. They may be redeemed in instalments or in lump-sum.

b. Irredeemable debentures are not repaid during the life time of the company but in the eventuality of winding up of the company. Irredeemable debentures may also be called as perpetual deben­tures.

5. On the Basis of Priority:

Debentures which have priority as to payment when the amount is realized from the property, charged for the security of the debenture-holders, are known as first debentures and those who are paid after satisfying the first mortgage debentures are known as the second or subordinate debentures.


Types of Debentures – Secured or Mortgage Debentures, Unsecured Debentures, Registered Debentures, Bearer Debentures, Redeemable Debentures and a Few Others

A company may issue the following types of debentures:

Type # 1. Secured or Mortgage Debentures:

These debentures are those which are secured either on particular assets of the Company called fixed charge or on all assets of the Company in general, called a floating charge. Fixed charge denies the Company from dealing with mortgaged assets, whereas the floating charge does not prevent the Company from using the assets.

If the Company is unable to repay the debentures on the due date, the debenture holders can realise their money from the assets mortgaged with them. First mortgage debentures are those that have a first claim on the assets charged and second mortgage debentures are those having a second claim on the assets charged. In India, debentures have necessarily to be secured.

Type # 2. Unsecured or Naked Debentures:

These debentures are those which are not given any security. The holders of such debentures are treated as unsecured creditors at the time of liquidation of the Company. Such debentures are not very common these days, so much so that, unless otherwise stated, a debenture is presumed to be secured.

Type # 3. Registered Debentures:

Names and addresses of the holders of such debentures are recorded in a register of the Company called, “Register of Debenture holders”. Such debentures are not freely transferable. The Transfer of such debentures requires the execution of a proper transfer deed. Principal amount and interest on such a debenture is paid to the person whose name appears in the Company’s register.

Type # 4. Bearer Debentures:

Names and addresses of the holders of such debentures are not recorded in the Company and these debentures are transferable by mere delivery. Payment of principal and interest is made to the bearer of such debentures. Coupons are attached with these debentures and the interest is paid to such persons who produce the coupons in the specified bank.

Type # 5. Redeemable Debentures:

Redeemable debentures are those debentures which will be repaid by the Company either in lump sum at the end of a specified period or by instalments during the lifetime of the Company. Most of the debentures are generally of this type.

Type # 6. Irredeemable or Perpetual Debentures:

Irredeemable debentures are those debentures which are not repayable by the Company during its life time. These debentures are repayable only at the time of liquidation of the Company.

Type # 7. Convertible Debentures:

Convertible debentures are those debentures which are convertible into equity shares or other securities at a stated rate of exchange either at the option of Debenture holders or at the option of the company after a specified period. When only a part of the amount of debenture is convertible into shares, such debentures are called ‘Partly Convertible Debentures’.

When the full amount of debenture is convertible into shares, such debentures are called ‘Fully Convertible Debentures’. SEBI Guidelines require that where the conversion is to be made at or after 18 months from the date of allotment but before 36 months, any conversion in part or whole shall be optional on the part of the Debenture holders. Convertible debentures are very popular these days, as they provide liquidity, safety, capital appreciation and assured return to the investors.


Types of Debentures – Categories of Debentures to Suit the Investment Preferences of Varieties of Investors

There are several types or kinds or categories of debentures to suit the investment preferences of varieties of investors.

A company may issue the following types of debentures on the basis of specific governing factors determining their type as mentioned:

1. Security Consideration:

(a) Secured or Mortgaged Debentures – These debentures are secured either by fixed charge or floating charge on the assets of the company. If the company falters to settle up debentures on the due date, the debentureholders can realise their money by auctioning (or selling) the assets mortgaged with them. In India, debentures issued by companies must necessarily be secured.

(b) Unsecured or Naked Debentures – These debentures have no security. The holders of such debentures are treated as unsecured creditors. Such debentures are not very common these days.

2. Redemption Consideration:

(a) Redeemable Debentures – These debentures are repayable by the company on the expiry of fixed period either in a single lump sum payment or through annual instalments during the lifetime of the enterprise. Another method for redemption is the purchase of own debentures from the open market. Today most of the debentures are redeemable.

(b) Irredeemable or Perpetual Debentures – An irredeemable debenture is one which is not redeemable or repaid during the life-time of the company but only at the time of liquidation. Such debentures are not popular among the investors.

3. Convertibility Consideration:

(a) Convertible Debentures – These debentures offer the investors an option to convert their debentures into shares at a stated rate of exchange after a certain period. Thus, convertible debentureholders can change their status from lenders and debentureholders to shareholders after a particular duration. Convertible debentures are of two types.

Partly Convertible Debentures – When only a part of the debentures amount is convertible into shares.

Fully Convertible Debentures – When the full amount of debentures is convertible into shares. Such debentures are very popular these days, as they provide liquidity, safety, capital appreciation and assured return to the investors.

(b) Non-convertible Debentures – Such debentures cannot be converted into shares.

4. Registration Consideration:

(a) Registered Debentures – These debentures are not transferable by mere delivery. Names and addresses of the holders of such debentures are recorded in the Register of Debentureholders. The transfer of debentures in this case requires the execution of regular transfer deed. Interest on these debentures is paid to the person whose name appears in the company’s register.

(b) Bearer Debentures – These debentures are transferable by mere delivery and the company does not keep any record of names and addresses of debentureholders. Interest on these debentures is paid by the company to a person who produces the interest coupon attached with the debentures.

5. Priority Consideration:

(a) First Debentures – The debentures, which have to be repaid before other debentures are paid, are known as first debentures.

(b) Second Debentures – The debentures, which will be repaid after the first debentures are redeemed, are known as second debentures.

6. Coupon Rate Consideration:

(a) Specific Coupon Rate Debentures – When the interest rate on debentures is pre-determined at a specific rate, that is the coupon rate which may be fixed or floating, the debentures are classified as specific coupon rate debentures. The floating interest rate is generally linked with the bank rate.

(b) Zero Coupon Rate Debentures (Bonds) – When debentures do not carry any specific rate of interest and carry heavy discounts upon their issue, they are zero coupon rate debentures. The difference between face value and issue price is the total amount of interest related to the duration of the debentures.

7. Collateral Debentures:

Collateral debentures are those debentures which may be issued to banks and financial institutions as an additional or subsidiary security in addition to certain principal security. Lending institutions can exercise their right as debentureholders, if the company does not pay loan and the principal security falls short. Such debentures are issued on temporary basis and the bankers refund the debentures whenever loan is repaid.


Types of Debentures – On the Basis of Convertibility, Security, Registration or Transferability, Redemption and Coupon Rate Point of View

1. On the Basis of Convertibility:

(i) Fully Convertible Debentures (FCD):

These debentures will be converted into equity shares after a specified period of time. The conversion is usually at the option of the debenture holders. The conversion may take place at one time or in installments. These debentures carry a relatively low rate of interest. The terms of conversion are normally known at the time of issue of the debenture.

(ii) Non-Convertible Debentures (NCD):

These debentures cannot be converted into equity shares. They are necessarily redeemed at the end of maturity period. They carry relatively higher rate of interest. They are secured by a charge on the assets of the company.

(iii) Partly Convertible Debentures (PCD):

These are debentures, a part of which will be converted into equity share capital. The conversion will take place after a specified period. The non- convertible portion will be redeemed as per the terms of the issue. It will continue to earn interest till the date of redemption.

2. On the Basis of Security:

(i) Secured Debentures:

These are debentures that are backed by some charge on some assets of the company. The security or charge may be on a specified fixed asset or floating charge on all assets of the company. In case of a fixed charge, the assets cannot be sold, except for redemption of debentures.

(ii) Unsecured Debentures:

These debentures are not backed by any security. They are also called as ‘Naked’ Debentures. They carry a high rate of interest. Usually, unsecured debentures are not issued unless they have other features such as conversion into equity shares within a short period.

3. On the Basis of Registration or Transferability:

(i) Registered Debentures:

If a company issues debentures, details of debenture holders are maintained in a debenture holder register. This enables the company to know the owner of such debentures, so that it can pass on to them, the benefits of holding the debentures. Thus, payment of interest on debentures, or issue of shares to debenture holders is done on the basis of debenture-holders register.

If a person purchases a debenture in the market, he has to necessarily get the debenture transferred in his name. In such cases, details of the original debenture holder are replaced with details of the new owner. Such transfer of debentures from one person to another can be done only by signing a transfer deed. Such debentures are called Registered Debentures.

(ii) Unregistered Debentures:

They are also called ‘Bearer’ debentures. As the name signifies, the bearer of the debenture is the owner of the debenture. There is no need of any registration of transfer. The person in possession of the debentures is its owner. Thus, a bearer debenture is a ‘negotiable instrument’. The debentures have interest coupons attached to them. The bearer of the debentures can produce the interest coupon and receive interest. These debentures are not very popular.

4. On the Basis of Redemption:

(i) Redeemable Debentures:

Debentures that are not redeemed on the expiry of a certain specified maturity period are called “Redeemable Debentures”. The redemption may be in lump sum or installments. For example, a debenture with a face value of Rs.100 may be redeemed in five equal installments of Rs.20 each, at the End of sixth, seventh, eighth, ninth and tenth years. Interest is payable on the amount not yet redeemed.

(ii) Irredeemable Debentures:

These are debentures that will not be repaid till perpetuity. Hence, they are also called “perpetual debentures”. The principal part of the debenture is repaid only on winding up of the company. The interest on such debentures is regularly paid.

5. From Coupon Rate Point of View:

(i) Coupon Paying Debentures:

These debentures are issued with a specified rate of interest, which is called the coupon rate. The specified rate may either be fixed or floating. The floating interest rate is usually tagged with the bank rate. Issue and Redemption of Debentures.

(ii) Zero Coupon Debentures:

These debentures do not carry any specified rate of interest. These debentures are issued at substantial discount to the face value and the difference between the face value and the issue price is treated as the amount of interest related to the duration of the debentures. For example, a debenture with face value of Rs.100 is issued at a discount of 50%. In such a case, investor pays only Rs.50 at the time of subscribing to the debenture. However, she gets back Rs.100 at the time of maturity.


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