Issue and Redemption of Debentures
What a debenture is
Tell debentures from shares and name each type of debenture.
A company can raise money in two ways: from owners, by issuing shares, or from lenders, by borrowing. A debenture is a written acknowledgement of a debt, issued under the company's seal. The company promises to repay the amount later and to pay a fixed interest meanwhile.
| Shares | Debentures | |
|---|---|---|
| Capital | owned capital | borrowed capital |
| Return | dividend, only out of profit | fixed interest, owed even in a loss year |
| Voting | yes | no |
| Repaid? | not during the company's life | yes, on the due date |
| Security | none | usually secured on assets |
Debenture interest is a charge on profit: it must be paid whether or not there is a profit. A dividend is an appropriation: it needs profit.
Types of debenture:
- By security: secured (by a fixed or floating charge on the company's assets) or unsecured.
- By tenure: redeemable (repaid on a fixed date) or irredeemable (perpetual, repaid only when the company is wound up).
- By conversion: convertible into shares (fully or partly), or non-convertible.
- By coupon (interest rate): a specific rate, or zero coupon: no interest, but issued at a deep discount, and the difference is the investor's gain.
- By registration: registered (the holder's name is recorded; transfer needs a deed) or bearer (transferred simply by delivery).
Shares own; debentures lend.
Practise this lesson
Questions that get harder as you improve, a Tutor that helps without giving the answer away, and progress you can see. Free for every learner.
No account, no email address. Opens the real product.