issue of debentures
Answers
Debentures are instruments of debt, which means that debenture holders become creditors of the company
They are a certificate of debt, with the date of redemption and amount of repayment mentioned on it. This certificate is issued under the company seal and is known as a Debenture Deed
Debentures have a fixed rate of interest, and such interest amount is payable yearly or half-yearly
Debenture holders do not get any voting rights. This is because they are not instruments of equity, so debenture holders are not owners of the company, only creditors
The interest payable to these debenture holders is a charge against the profits of the company. So these payments have to be made even in case of a loss.
Advantages of Debentures
One of the biggest advantages of debentures is that the company can get its required funds without diluting equity. Since debentures are a form of debt, the equity of the company remains unchanged.
Interest to be paid on debentures is a charge against profit for the company. But this also means it is a tax-deductible expense and is useful while tax planning
Debentures encourage long-term planning and funding. And compared to other forms of lending debentures tend to be cheaper.
Debenture holders bear very little risk since the loan is secured and the interest is payable even in the case of a loss to the company
At times of inflation, debentures are the preferred instrument to raise funds since they have a fixed rate of interest
Browse more Topics under Issue And Redemption Of Debentures
Issue of Debentures
Terms of Issue, Interest on Debentures
Redemption of Debentures
Disadvantages of Debentures
The interest payable to debenture holders is a financial burden for the company. It is payable even in the event of a loss
While issuing debentures help a company trade on equity, it also makes it to dependent on debt. A skewed Debt-Equity Ratio is not good for the financial health of a company
Redemption of debentures is a significant cash outflow for the company which can imbalance its liquidity
During a depression, when profits are declining, debentures can prove to be very expensive due to their fixed interest rate