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WhatisaDebenture? ADebentureisadebtsecurityissuedbyacompany(calledtheIssuer),whichofferstopayinterestin lieuofthemoneyborrowedforacertainperiod. ThesearelongtermdebtinstrumentsIssuedbyPrivateSectorCompanies. TheseareissuedindenominationsaslowasRs1000andhavematuritiesrangingbetweenone andtenyears. DebenturesenableinvestorstoreaptheDualBenefitsofAdequateSecurityandGoodReturns. UnlikeotherFixedIncomeInstrumentssuchasFixedDeposits,BankDepositstheycanbe transferredfromonepartytoanotherbyusingtransferfrom. Debentureswereissuedinphysicalform.Nowcorporate/PSUshavestartedissuingdebentures inDematform. Debenturescanbelistedonastockexchange,givingyouanopportunitytosellthemandexit earlierthenthetenureofthedebenture.
InSimpleWords,Adebentureisadebtinstrument,justlikeafixeddeposit(FD),usuallyissuedbya company.Youinvestasum,andthecompanypaysyouafixedrateofinterestforthepredefined period.Aftertheperiodgetsover,yougetbackyourprincipalamount. So,whatisthedifferencebetweenadebentureandacompanyfixeddeposit(FD)?Theyareverysimilar butthekeydifferenceisliquidity. Whatarethedifferenttypesofdebentures? Debenturesaredividedintodifferentcategoriesonthebasisof:(1)convertibilityoftheinstrument(2) Security Debenturescanbeclassifiedonthebasisofconvertibilityinto: NonConvertibleDebentures(NCD):Theseinstrumentsretainthedebtcharacterandcannotbe convertedintoequityshares PartlyConvertibleDebentures(PCD):ApartoftheseinstrumentsareconvertedintoEquity sharesinthefutureatnoticeoftheissuer.Theissuerdecidestheratioforconversion.Thisis normallydecidedatthetimeofsubscription. FullyconvertibleDebentures(FCD):ThesearefullyconvertibleintoEquitysharesattheissuer's notice.Theratioofconversionisdecidedbytheissuer.Uponconversiontheinvestorsenjoythe samestatusasordinaryshareholdersofthecompany. OptionallyConvertibleDebentures(OCD):Theinvestorhastheoptiontoeitherconvertthese debenturesintosharesatpricedecidedbytheissuer/agreeduponatthetimeofissue.
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ABriefNoteonDebentures
OnbasisofSecurity,debenturesareclassifiedinto: SecuredDebentures:Theseinstrumentsaresecuredbyachargeonthefixedassetsofthe issuercompany.Soiftheissuerfailsonpaymentofeithertheprincipalorinterestamount,his assetscanbesoldtorepaytheliabilitytotheinvestors UnsecuredDebentures:Theseinstrumentareunsecuredinthesensethatiftheissuerdefaults onpaymentoftheinterestorprincipalamount,theinvestorhastobealongwithother unsecuredcreditorsofthecompany.
Whatisexactlymeantbythetermsecuredredeemabledebenture? Securedreferstothesecuritygivenbytheissuerfortheloantransactionrepresentedbythe debenture. Thisisusuallyintheformofafirstmortgageorchargeonthefixedassetsofthecompanyona paripassubasiswithotherfirstchargeholderslikefinancialinstitutionsetc. Sometimes,thechargecanalsobeasecondchargeinsteadofafirstcharge.Mostofthetimes thechargeiscreatedonbehalfoftheentirepoolofdebentureholdersbyatrusteespecifically appointedforthepurpose. Redeemablereferstotheprocesswherebythedebentureisextinguishedonpaymentofallthe obligationsduetotheholderaftertherepaymentofthelastinstallmentoftheprincipalamount ofthedebenture.
Whatisadifferencebetweenabondandadebenture? LongtermdebtsecuritiesissuedbytheGovernmentofIndiaoranyoftheStateGovernmentsor undertakingsownedbythemorbydevelopmentfinancialinstitutionsarecalledasBONDS. InstrumentsissuedbyotherentitiesarecalledDEBENTURES. Thedifferencebetweenthetwoisactuallyafunctionofwheretheyareregisteredandpay stampdutyandhowtheytrade. WhatistheCouponrateoftheSecurity? TheCouponrateissimplytheinterestratethateverydebenture/Bondcarriesonitsfacevalueandis fixedatthetimeofissuance. Forexample,a12%p.acouponrateonabond/debentureofRs100impliesthattheinvestor willreceiveRs12p.a.Thecouponcanbepayablemonthly,quarterly,halfyearly,orannuallyor cumulativeonredemption
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ABriefNoteonDebentures
WhatismeantbyaMaturitydateforSecurity? Securitiesareissuedforafixedperiodoftimeattheendofwhichtheprincipalamountborrowedis repaidtotheinvestors.Thedateonwhichthetermendsandproceedsarepaidoutisknownasthe Maturitydate.Itisspecifiedonthefaceoftheinstrument. InrespectofDematDebtinstrumentduedateisknownfromISINNumberofthesecurity. WhatisRedemptionofBond/Debenture? Onreachingthedateofmaturity,theissuerrepaysthemoneyborrowedfromtheinvestors.Thisis knownasRedemptionorRepaymentofthebond/debenture. Iftheredemptionproceedsaremorethanthefacevalueofthebond/debentures,thedebenturesare saidtoberedeemedatapremium.Ifonegetslessthanthefacevalue,thentheyareredeemedata discountandifonegetsthesameastheirfacevalue,thentheyareredeemedatpar. WhatismeantbyCurrentyield? Thisistheyieldorreturnderivedbytheinvestoronpurchaseoftheinstrument(yieldrelatedto purchaseprice) Itiscalculatedbydividingthecouponratebythepurchasepriceofthedebenture.Fore.g:Ifan investorbuysa10%Rs100debentureofABCcompanyatRs90,hiscurrentYieldontheinstrument wouldbecomputedas: CurrentYield=(10%*100)/90X100,Thatis11.11%p.a. WhatisYieldtomaturity(YTM)? TheyieldorthereturnontheinstrumentisheldtillitsmaturityisknownastheYieldtomaturity(YTM). ItbasicallymeasuresthetotalincomeearnedbytheinvestorovertheentirelifeoftheSecurity. Thistotalincomeconsistsofthefollowing: Couponincome:Thefixedrateofreturnthataccruesfromtheinstrument Interestoninterestatthecouponrate:Compoundinterestearnedonthecouponincome Capitalgains/losses:Theprofitorlossarisingonaccountofthedifferencebetweenthepricepaidfor thesecurityandtheproceedsreceivedonredemption/maturity.
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ABriefNoteonDebentures
WhatisPutandCallOptionsinDebentures? Debenturescanhaveputand/orcalloptions. Aputoptionmeansthatyouhaveanoptiontosurrenderthedebentureifyouwantto,and getbackyourprincipal. Acalloptionmeansthatthecompanyhasanoptiontoaskyoutosurrenderthedebenture, andpaybacktheprincipaltoyou. Aputoptiongivesalotofflexibilitytoyouifinterestratesgoup,andyoucangetbetter ratesfromthemarket,youcanexercisetheputoptionandgetbackyourmoney.Youcaninvest itelsewhere,andgetbetterinterest. Acalloptiongivesflexibilitytothecompanyifinterestratesgodown,andthecompanycan getfundsatlowerratesfromthemarket,itcanexercisethecalloptionandgiveyourmoney backtoyou.Itcanthenraisemoneyfromthemarketatlowerrates.
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