When you search for corporate finance, company debentures serve as crucial loan instruments for small or medium-scale enterprises for a longer period. When you compare the bond and debenture differences, debentures are offered by both the government and large organizations. Debentures typically function on the reputation of the issuing bodies at a fixed rate of interest.
Leading authority bodies issue debentures when they wish to borrow money from the public at a fixed rate of interest.
Types of Debentures
- Secured Debentures: When company debentures are secured against assets of the involved organzation, these are referred to as mortgage or secured debentures.
If the security is placed on the issuing organization’s assets, then it is referred to as fixed charge debentures. On the contrary, if the security is not particular but the organization’s general assets, they are referred to floating charge debentures.
Some of the examples of secured debentures are a factory building or a company building. If the company is insolvent, it is expected that the loan amount will be cleared before the property is sold off. These are further divided into the following categories:
- Preferred or First Mortgage Debenture: The obligations in this case are fulfilled first with preference at the time of realization of the asset.
- Ordinary or Second Mortgage Debentures: Once the first mortgage debentures’ debts are fulfilled, this type of debenture is serviced at the event of realization.
- Unsecured Debentures: These types of debentures are created only out of the organization’s credibility. They do not carry securities against the company’s assets. Therefore, the relevant company does not provide any protection on the interest rate or on paying off the loan amount to the respective holders.
- Convertible Debentures: These can be regarded as mixed financial tools that possess the advantages of both equity shares and debt. People who possess company debentures, like convertible debentures, are given the freedom to convert their assets into relevant stocks. This conversion will be executed with a specific ratio. After a specific period, the conversion will depend on the given terms & conditions of the contract.
Moreover, convertible debentures are also classified as fully convertible and partially convertible. As the name suggests, fully convertible debentures can be converted entirely into relevant equities. On the other hand, in the case of partially convertible debentures, only a specific part of the financial instrument can be converted into stocks according to the norms of the contract.
- Non-convertible Debentures: Debentures that do not permit the holders to choose the option of converting debts to stocks are referred to as non-convertible debentures. This type of debenture can be regarded as a debt only.
- Redeemable Debentures: When the organization issuing debentures are legally mandated to redeem the debenture certificate on a specific date while paying the respective return to investors, it is referred to as redeemable debentures.
- Irredeemable Debentures: In contrast to redeemable debentures, irredeemable debentures do not have a specific redemption date associated with them. Therefore, it is possible to redeem these debentures either when the organization liquidates its assets or according to the terms & conditions of the debenture contract. Another common term for this debt instrument is perpetual debenture.
In the existing security market in India, it is not allowed to sell this type of debenture.
- Registered Debentures: These are another type of debt tool where the credentials of the holder, including the name, residential address, and bank details, are legally registered with the issuing body. Therefore, investors are expected to update the organization when the company’s debenture has been transferred to another individual.
Otherwise, the accumulated return will be credited to the previous holder.
- Bearer Debenture: In case of a bearer debenture, there are no investor details associated with registration. With the help of a simple delivery process, the debentures are eventually transferred to new holders. At the same time, the accumulated interest is paid at the exchange of the coupon linked to the debenture certificate.
Features of Debentures
As a major investment tool, debentures boast some attractive features. Some of the typical features of a debenture are:
- In case of a debenture, as the rate of interest is determined with a fixed income rate and the investment is secured with the charge of the assets of the organization, this is regarded as an ideal investment option. For all types of investors, a fixed return at reduced risk is regarded as the preferred investment opportunity.
- When you hold company debentures, this does not mean the ownership of the entire company. Therefore, debenture holders usually do not have any right to vote or control the management of the issuing body. Still, in case of a default return, holders can leverage legal steps against the issuing company.
- Debentures come with a higher face value. Therefore, they usually offer a higher rate of investment.
- In case of a company’s liquefaction, debenture holders usually get preferences with respect to repaying the borrowing amount.
- Irrespective of getting a profit or loss, the respective company is mandated to return the obligations at a fixed rate of interest to the respective holders.
What is a Debenture Stock?
Usually, debentures and debenture stocks are treated interchangeably. However, it is important to understand that they are not similar. Government bodies and companies issue debt instruments or securities to accumulate funds at times through debentures.
On the other hand, debenture stocks can be referred to as loan contracts between an organization and the holders. In this case, the holders are given dividends from the profit earned by the organization, at fixed intervals.
Conclusion
When it comes to comparing the bond and debenture difference, debentures can be regarded as a safe investment option where your money will be protected. Moreover, the return here is also determined at a fixed interest rate irrespective of the profit or loss of the issuing organization.
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