What are Debentures and Why Are They Issued?
Debentures are a type of corporate bond that is created by companies. The money borrowed to create debentures is called the face value.
In exchange for the money, the company agrees to pay interest on debentures over a fixed period of time. Once the debenture matures, the company has to pay back the face value in exchange for the right to redeem it.
A debenture is a debt instrument not backed by collateral and is typically issued by a corporation. Debentures are often used to finance expansion or other major projects.
Interest on a debenture is usually paid at a fixed rate, although some debentures have variable rates of interest. The interest may be paid monthly, quarterly, or annually. The maturity date is the date on which the debenture expires and the principal amount must be repaid.
A debenture holder is a creditor of the issuing company and does not have voting rights. However, debenture holders may be able to convert their debentures into equity or voting shares at some point in the future.
Features of a Debenture
One of the prominent features of debentures is their unsecured nature, meaning they are not backed by any specific asset of the issuing company. This makes debentures different from other forms of debt like secured bonds. Additionally, debentures often offer higher interest rates compared to other investments due to their inherent riskiness.
Investors are typically attracted to this financial instrument for its regular interest payments, which are typically guaranteed by the issuing company. Furthermore, debentures often come with specific maturity dates, giving investors a clear timeline for their investments. This feature adds a level of predictability and allows investors to plan their finances accordingly. Debentures are an attractive option for both investors and organizations looking to raise capital, as they provide a secure and lucrative investment opportunity.
Why Issue Debentures Rather than Issue Share?
Debentures and shares are two common methods of raising capital for a business. While both options serve the purpose of acquiring funds, there are several reasons why a company might choose to issue debentures rather than issuing shares.
Firstly, debentures are a form of long-term debt, whereas shares represent ownership in the company. By issuing debentures, a company can avoid diluting existing shareholders’ ownership and control over the business. Additionally, debentures offer fixed interest payments, which can be more predictable for the company’s financial planning. Furthermore, issuing debentures allows a company to retain profits generated from business growth, rather than sharing them with new shareholders.
Overall, debentures offer businesses an attractive alternative to issuing shares, providing financial flexibility and maintaining control over the organization’s ownership structure.
