Question

Explain ‘Debentures’. Also, state their merits and demerits.

Answer 1

Answer:

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Explanation:

In layman’s term, a Debenture is the acknowledgment of the debt the organization has taken from the public at large. They are very crucial for raising long-term debt capital. A company can raise funds through the issue of debentures, which has a fixed rate of interest on it. The debenture issued by a company is an acknowledgment that the company has borrowed an amount of money from the public, which it promises to repay at a future date. Debenture holders are, therefore, creditors of the company.

Advantages and Disadvantages of Debentures

Advantages of Debentures

Investors who want fixed income at lesser risk prefer them.

As a debenture does not carry voting rights, financing through them does not dilute control of equity shareholders on management.

Financing through them is less costly as compared to the cost of preference or equity capital as the interest payment on debentures is tax deductible.

The company does not involve its profits in a debenture.

The issue of debentures is appropriate in the situation when the sales and earnings are relatively stable.

Disadvantages of Debentures

Each company has certain borrowing capacity. With the issue of debentures, the capacity of a company to further borrow funds reduces.

With redeemable debenture, the company has to make provisions for repayment on the specified date, even during periods of financial strain on the company.

Debenture put a permanent burden on the earnings of a company. Therefore, there is a greater risk when the earnings of the company fluctuate.

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Answer 2

A debentures is one of the most typical forms of long term loans that a company can take . it is normally a loan that should be repaid on specific date , but some debentures are irredeemable securities . the majority of debentures come with a fixed interest rate.

disadvantages

a: payment of interest on debentures is obligatory and hence it becomes burden if teh company incurs the loan.

b: debentures are issued to trade on equity but too much dependence on debentures increases the financial risk of the company.

advantages

a: debentures can be secured against the assets of the company or may be insecured.

b: debentures are generally freely transferable by the debentures holder..