Debenture – Fixed Income Investment
The debenture is also a good investment option but it is not known to many.
There are many tools to invest the money in the market. The popular investment destinations include the stock market, mutual funds, gold real estate etc. But there are few more places to invest the money which are not well known to every one. A debenture is also an investment tool which not common to everyone. In this post, we will discuss the debentures.
What is Debenture?
A debenture is a long-term security which is not secured by any asset or collateral. They are only supported by the credit and reputation of the issuer. They have a fixed interest rate. Debentures are issued by the governments or companies to borrow money. They issue to raise short-term capital to meet the expenses. These come under the fixed-income category of the investment. It is like a long-term loan taken by the company.
Debentures Vs Bonds
- Bonds and debentures both are issued by the corporates or governments.
- They both have a rate of interest and a tenure.
- They both can be purchased through a broker.
- Bond is supported by collaterals while debentures are not supported by any collateral.
- Bonds could never be converted into equity shares but some debentures may be converted into equity shares.
- Bonds may have periodic interest rates while debenture has a fixed interest rate.
Types of Debentures
There are mainly two types of debentures:-
- Convertible Debentures
- NonConvertible Debentures (NCD)
Convertible Debenture: These are the bonds that can be converted into equity shares of the issuing company after a specific time. They typically have lower interest rates as compared to nonconvertible debentures.
NonConvertible Debentures (NCD): These are the regular debentures that cannot be converted into the equity shares of the issuing company. This type of debenture has a higher interest rate as compared to convertible debentures.
Features of Debentures
A debenture has the following features:-
- Agreement between the issuer and a trust that manages the interest if investors.
- Face Value
- A Coupon/Interest Rate
- Maturity Date
- Redemption option
Redemption of Debentures
There are following methods of redemption of debentures:-
- Redeemable at par: Redeemed at their face value.
- Redeemable at a Premium: Redeemed at an amount higher than its face value.
- Redeemable at a Discount: Redeemed at an amount lower than its face value.
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