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Debenture Bonds ,Types, Features, and Advantages

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What Is Debenture?

A debenture is a loan instrument issued by companies or governments to borrow funds for a certain period. The investors who purchase debentures are the issuer’s creditors; consequently, the issuer has to pay the principal back at the end of the period. In addition, issuers also pay interest.

There are two significant kinds of convertible and non-convertible.

Convertible Debentures: Debentures that can be transformed into shares in the equity of the company issuing them following a specified period are known as convertible debentures. These kinds of bonds attract investors because they can be converted to equity shares. Furthermore, it is highly sought-after by businesses since they pay a lesser interest rate than non-convertible bonds.

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Non-Convertible Debentures: The debentures which can’t be changed to equity shares are referred to as non-convertible debentures. They are characterized by a higher interest rate than convertible debentures since they can’t convert.

Features Of Debentures

These are the most critical features of debentures.

  • Debentures are documents that state that the issuer owes funds to the holders of debentures.
  • The debt issuer frequently offers coupon payments to holders of the debentures in exchange for supplying the funds. The interest rates on debentures could fluctuate or be fixed rates.
  • The maturity period of a debt is an established maturity date, typically long-term to medium-term, after which the issuer has to pay its principal sum to holders of the.
  • Debenture holders can acquire company assets first, before preferred and equity shareholders, in the direst event of liquidation.

Pros

  • Convertible debentures convert to equity shares following a specified period, making them more attractive.
  • A debenture pays interest at a normal amount to investors.
  • If a company’s insolvent, the debenture will be paid before the common stock shareholders.

Cons

  • Debentures are subject to inflation if the coupon issued cannot keep pace with inflation.
  • Fixed-rate debentures carry the interest rate risk exposure when the market’s interest rate increases.
  • It is essential to consider creditworthiness in assessing the likelihood of default risk arising from the issuer’s financial stability.
  • Creditos are constantly exposed to the risk of inflation. Inflation is the term used to describe price increases.
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