Scribd Logo
Upload

Welcome to Scribd!

  • A Brief Note On Debentures

    Uploaded by

    Sandeep Singh
    114 views4 pages
    Debentures are long-term debt instruments issued by Private Sector Companies. These are issued in denominations as low as Rs 1000 and have maturities ranging between one and ten years. A debenture is a debt instrument, just like a company fixed deposit (FD), usually issued by a company. You invest a sum, and the company pays you a fixed rate of interest for the pre-defined period. After the period gets over, you get back your principal amount.

    Original Description:

    Original Title

    A Brief Note on Debentures

    Copyright

    © Attribution Non-Commercial (BY-NC)

    Available Formats

    PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    Report this Document
    Debentures are long-term debt instruments issued by Private Sector Companies. These are issued in denominations as low as Rs 1000 and have maturities ranging between one and ten years. A debenture is a debt instrument, just like a company fixed deposit (FD), usually issued by a company. You invest a sum, and the company pays you a fixed rate of interest for the pre-defined period. After the period gets over, you get back your principal amount.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
    Flag for inappropriate content
    114 views4 pages

    A Brief Note On Debentures

    Uploaded by

    Sandeep Singh
    Debentures are long-term debt instruments issued by Private Sector Companies. These are issued in denominations as low as Rs 1000 and have maturities ranging between one and ten years. A debenture is a debt instrument, just like a company fixed deposit (FD), usually issued by a company. You invest a sum, and the company pays you a fixed rate of interest for the pre-defined period. After the period gets over, you get back your principal amount.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
    Flag for inappropriate content
    of 4

    ABriefNoteonDebentures

    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.

    Page1of4

    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

    Page2of4

    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.

    Page3of4

    ABriefNoteonDebentures
    WhatisPutandCallOptionsinDebentures? Debenturescanhaveputand/orcalloptions. Aputoptionmeansthatyouhaveanoptiontosurrenderthedebentureifyouwantto,and getbackyourprincipal. Acalloptionmeansthatthecompanyhasanoptiontoaskyoutosurrenderthedebenture, andpaybacktheprincipaltoyou. Aputoptiongivesalotofflexibilitytoyouifinterestratesgoup,andyoucangetbetter ratesfromthemarket,youcanexercisetheputoptionandgetbackyourmoney.Youcaninvest itelsewhere,andgetbetterinterest. Acalloptiongivesflexibilitytothecompanyifinterestratesgodown,andthecompanycan getfundsatlowerratesfromthemarket,itcanexercisethecalloptionandgiveyourmoney backtoyou.Itcanthenraisemoneyfromthemarketatlowerrates.

    IncomeTaxTreatment? Forincometaxpurpose,thedebenturesaretreatedlikedebtinstruments. Sincedebentureisacapitalasset. Ifyousellthedebentureonthestockexchangebeforeholdingitforayear,itwouldbeaShort TermCapitalGainitwouldbeincludedinyourincomeandwouldbetaxasperprevailingIT slabs. Ifyousellitonanexchangeafterholdingitforayearormore,thegainwouldbelongterm capitalgain.ThisLTCG(LongTermCapitalGain)shouldbecalculatedwithoutindexation,and wouldbetaxedat10%ofthegain.

    Page4of4

    You might also like