Thursday, April 2, 2015

Debenture

A debenture îs document that either creates debt - acknowledges it, & it îs debt without collateral, In corporate finance, term îs used for medium- to long-term debt instrument used by large companies to borrow money, In some countries term îs used interchangeably with bond, loan stock - note, A debenture îs thus like certificate of loan - loan bond evidencing fact that company îs liable to pay specified amount with interest & although money raised by debentures becomes part of company's capital structure, it does not become share capital, Senior debentures get paid before subordinate debentures, & there are varying rates of risk & payoff for these categories,

Debentures are generally freely transferable by debenture holder, Debenture holders have no rights to vote în company's general meetings of shareholders, but they may have separate meetings - votes e,g, on changes to rights attached to debentures, The interest paid to them îs charge against profit în company's financial statements,

Attributes

    A movable property,

    Issued by company în form of certificate of indebtedness,

    It generally specifies date of redemption, repayment of principal & interest on specified dates,

    May - may not create charge on assets of company,

    Corporations often issue bonds of around $1000, while government bonds are more likely to be $5000,


Debentures gave rise to idea of rich "clipping their coupons," which means that bondholder will present their "coupon" to bank & receive payment each quarter (or în whatever period îs specified în agreement),


There are also other features that minimize risk, such as "sinking fund," which means that debtor must pay some of value of bond after specified period of time, This decreases risk for creditors, as hedge against inflation, bankruptcy, - other risk factors, A sinking fund makes bond less risky, & therefore gives it smaller "coupon" (or interest payment), There are also options for "convertibility," which means creditor may turn their bonds into equity în company if it does well, Companies also reserve right to call their bonds, which mean they can call it sooner than maturity date, Often there îs clause în contract that allows this; for example, if bond issuer wishes to rebuy 30 year bond at 25th year, they must pay premium, If bond îs called, it means that less interest îs paid out,



Failure to pay bond effectively means bankruptcy, Bondholders who have not received their interest can throw offending company into bankruptcy, - seize its assets if that îs stipulated în contract,

[edit] Security în different jurisdictions



In United States, debenture refers specifically to unsecured corporate bond, i,e, bond that does not have certain line of income - piece of property - equipment to guarantee repayment of principal upon bond's maturity, Where security îs provided for loan stocks - bonds în US, they are termed 'mortgage bonds',


However, în United Kingdom debenture îs usually secured,

In Canada, debenture refers to secured loan instrument where security îs generally over debtor's credit, but security îs not pledged to specific assets, Like other secured debts, debenture gives debtor priority status over unsecured creditors în bankruptcy; however debt instruments where security îs pledged to specific assets (such as bond) receive higher priority status în bankruptcy than do debentures[citation needed],


In Asia, if repayment îs secured by charge over land, loan document îs called mortgage; where repayment îs secured by charge against other assets of company, document îs called debenture; & where no security îs involved, document îs called note - 'unsecured deposit note',
Convertibility

There are two types of debentures:


    Convertible debentures, which are convertible bonds - bonds that can be converted into equity shares of issuing company after predetermined period of time, "Convertibility" îs feature that corporations may add to bonds they issue to make them more attractive to buyers, In other words, it îs special feature that corporate bond may carry, As result of advantage buyer gets from ability to convert, convertible bonds typically have lower interest rates than non-convertible corporate bonds,

    Non-convertible debentures, which are simply regular debentures, cannot be converted into equity shares of liable company, They are debentures without convertibility feature attached to them, As result, they usually carry higher interest rates than their convertible counterparts,

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