Let us start with the basic introdcution and know about the debetures and other terms that are related to it.
What is a debenture?
In corporate finance, a medium or a long-term debt instrument that the large companies use with the purpose of borrowing the amount at a particular interest rate is known as a DEBENTURE. A debenture is a legal term that refers to a document that is used to either create a debt or to acknowledge it, but, in some countries, the term is used to refer to a bond, loan stock or note. Thus, the debentures serve the purpose of the certificate of loan or loan of the bond, with the proof of the fact that the company is accountable to repay the particular amount along with the interest.
Striking Features of Debentures are as follows:
- Debts can be acknowledged by debentures
- A Debenture is in the form of a certificate and is issued under the seal of the company and is known as Debenture Deed.
- The amount and the date of repayment of the loan are mentioned on Debenture.
- Assets and possessions of the company can be used for securing the debentures. Also, there are debentures that are unsecured.
- The interest paid on debentures is against the profit in the financial statements of the company.
There are many terms that are related to debentures. Here are some of those:
- Bond: A bond refers to a fixed income instrument that signifies a loan that is made by a stakeholder to a debtor. There are companies, municipalities, states, and sovereign governments that make use of bonds to finance projects and operations.
- Debenture Holder: Debenture holder refers to a person or an organization that has lent money to a corporation in the form of debentures.
- Debenture Interest: Debenture interest refers to the amount of money that is paid on a regular basis to the investors on debentures. The interest on debentures has to be paid by the company whether it makes a profit or not.
- Debenture stock: Debenture Stock refers to the contract that has been issued by the company, further stating the commitment to return the funds that have been borrowed and pay the interest, that is secured by all or some part of the company’s possessions.
- The issue of Debentures: The issue of debentures is similar to the issue of shares by a company. In this, the amount is collected either in installments or lump sum. Debentures can be issued for cash or related to other aspects.
- Redemption of Debentures: The payment of the amount of the debentures by the company is known as the redemption of debentures. At the time of redemption, the liability on account of debentures is discharged.
- Debenture Redemption Reserve: A debenture redemption reserve refers to a provision that states that any corporation of India that issues the debentures should create a debenture redemption service in order to protect the investors against the possibility of default by the company.
Must Read: The Issue of Debentures by a Company