Question

name an instrument which is an acknowledge of debt and is used for raising long term loan.also explain its merits and demerits.​

Answer 1

Debentures is the instrument like this

Merits:

Investors who want fixed income at lesser risk prefer them....

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.

Demerits :

(a) Payment of interest on debenture is obligatory and hence it becomes burden if the company incurs loss. (b) Debentures are issued to trade on equity but too much dependence on debentures increases the financial risk of the company.

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