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Detailed Notes On Debentures BCom Hons

Debentures are long-term debt instruments issued by companies to raise funds, offering fixed interest and principal repayment at maturity. They can be secured or unsecured, redeemable or irredeemable, and convertible or non-convertible, providing advantages such as tax-deductible interest for companies and fixed income for investors. Understanding debentures is crucial for B.Com (Hons.) students in Business Mathematics and Financial Management.

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114 views3 pages

Detailed Notes On Debentures BCom Hons

Debentures are long-term debt instruments issued by companies to raise funds, offering fixed interest and principal repayment at maturity. They can be secured or unsecured, redeemable or irredeemable, and convertible or non-convertible, providing advantages such as tax-deductible interest for companies and fixed income for investors. Understanding debentures is crucial for B.Com (Hons.) students in Business Mathematics and Financial Management.

Uploaded by

Vandana Dhiman
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Debentures – In-depth Notes (B.

Com
Hons. – Business Mathematics)
1. Meaning of Debentures
A debenture is a long-term debt instrument issued by a company to raise funds from the
public or institutions. It is a written acknowledgment of debt, under which the company
promises to pay a fixed rate of interest and repay the principal after a certain period.

Debenture holders are creditors of the company—not owners or shareholders.

2. Features of Debentures
Feature Description

Issuer Usually issued by public or private limited


companies.

Interest Rate (Coupon) Fixed and payable at regular intervals


(annually/half-yearly).

Tenure Issued for a specific term (e.g., 5, 10, 15


years).

Repayment Principal is repaid on maturity or through a


sinking fund.

Tradability Debentures can be traded on stock


exchanges.

Security Can be secured (against assets) or


unsecured (based on creditworthiness).

No Ownership Debenture holders do not have voting


rights.

3. Types of Debentures
A. Based on Security

 - Secured Debentures: Backed by specific assets of the company.


 - Unsecured (Naked) Debentures: No collateral; higher risk.
B. Based on Redemption

 - Redeemable Debentures: Repaid on a specified date or through installments.


 - Irredeemable (Perpetual) Debentures: Paid only on company liquidation.

C. Based on Convertibility

 - Convertible Debentures: Can be converted into equity shares.


 - Non-Convertible Debentures (NCDs): Remain as debt instruments.

D. Based on Registration

 - Registered Debentures: Issued in name of holders.


 - Bearer Debentures: Transferable by mere delivery.

4. Debenture Interest (Business Mathematics Perspective)


Formula for Interest:
Interest = (FV × R × T) / 100

Where: FV = Face Value, R = Rate of Interest, T = Time in years.

Example:
A company issues 500 debentures of Rs. 1,000 each at 9% interest for 4 years.

Interest per debenture = (1000 × 9 × 4)/100 = Rs. 360

Total Interest = 500 × 360 = Rs. 1,80,000

5. Advantages of Debentures
 To the Company:

 - No dilution of control
 - Interest is tax-deductible
 - Raises long-term capital at fixed cost

 To Investors:

 - Fixed and regular income


 - Less risky than equity
 - Priority in repayment over shareholders

6. Disadvantages of Debentures
 To the Company:
 - Mandatory interest payments
 - Increases financial risk
 - May require asset pledge

 To Investors:

 - No profit beyond fixed interest


 - No voting rights
 - Risk of default in bad years

7. Difference between Debentures and Shares


Basis Debentures Shares

Ownership Creditor Owner

Return Fixed interest Variable dividend

Repayment Mandatory Not repaid (except on


liquidation)

Risk Lower Higher

Voting Rights No Yes (equity)

8. Conclusion
Debentures are a powerful instrument in corporate finance. They allow companies to raise
funds without giving up control, while providing investors with a secure and fixed return.
For B.Com (Hons.) students, a solid understanding of both financial and mathematical
treatment of debentures is essential for success in Business Mathematics and Financial
Management.

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