Question

4. What are the various methods of redemption of debentures?​

Answer 1

Explanation:

Ways to Redeem Debentures

1.1 Lump Sum Payment on a Fixed Date.

1.2 Payment in Annual Installment.

1.3 Debenture Redemption Reserve / Sinking Fund.

1.4 Buy from Open Market.

1.5 Conversion into Shares.

1.6 Call and Put Option.

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Answer 2

Redemption of debentures indicates payment by the client of the sum of debentures. The liabilities for debentures are disbursed when debentures are redeemed. The sum of money needed to redeem debentures is very high and so prudent companies have ample income and accumulate funds to redeem debentures.

Explanation:

Sources of Redemption of Debentures

1. Redemption of Debentures out of Capital: In accordance with this process, the firm may dispose of fixed assets and redeem debentures with sales proceeds. It is a very peculiar financial source, however, which is rarely observed. The Company will again redeem the debentures using its working capital. This adversely impacts the company's working capital. The company's assets are reduced in any event. Nevertheless, it is not possible to redeem debentures solely out of capital in view of the legal conditions surrounding the creation of the DRR.
2. Redemption  of Debentures out of Profits: The repayment of debenture out of profits means a transferring to DRR an sum equivalent to the face value of debentures charged. Therefore, a part of the profits of company are withheld from distributing to the shareholders.

Methods of Redemption

• Redemption of debentures in lump-sum at maturity: Under this case, at the end of the stated duration, debentures will be repaid under one lump sum. Debentures may be redeemed at par, premium or discount. Under this method there are different methods

1. Sinking fund Method: In compliance with this process, the company annually disburses a certain proportion of its earnings and loans to the redemption fund. It invests the same in 1st class securities in order to receive the necessary funds during redemption. The investment value is also deposited where the debentures are due for repayment; assets are sold and proceeds utilized for redeeming the debentures.
2. Insurance Policy Method: In this approach, the company takes an insurance policy for the appropriate sum for the redemption of debentures rather than buying investments.Redemption of Debentures by Lots: According to this method, the firm redeems debentures annually. The payments are chosen by lot drawing

• Redemption of Debentures by purchasing them in the Open Market: The firm also buys debentures on the open market and sells them for its convenience. It can buy the debentures on a par, premium or discount basis

• Redemption of Debentures by Conversion: At time a firm redeems debentures by converting them into a new class of debentures/shares.

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