Cambridge IGCSE Accounting(0452)/O Level Principles of Accounts(7110) Notes: Introduction to Debentures
A debenture certificate. Image credit scripophily.net
- These are loan stocks that are issued to the company.
- A debenture is simply a document or certificates that acknowledges said loan.
- Debentures are creditors to the company and are, in the event of liquidation,
- the first to receive their monies.
- They usually earn a fixed rate of interest and are typically redeemable.
- Some debentures are convertible.
Types of Debentures
Convertible debentures
- these can be converted into one form of stock or another for example into ordinary shares,
- at the discretion of the of the debenture holder at a predetermined future date.
- For example Debentures can have the option to be converted into either Ordinary or Preference shares after a certain date.
Naked debentures
- also known as simple debentures, these are issued without security since they are unsecured and not tied to any specific asset within the company.
- These debentures are considered insecure in the event of liquidation since they have to wait in line with other creditors although they receive the money before the shareholders.
Floating debentures
- such debentures are secured by floating amounts on all the assets of the company.
- Such assets may be Debtors, Stock etc.
- These debentures are typically secured on the current assets of the company.
Mortgage debentures
- these debentures are secured on the more permanent assets of the company such as Plant Property and Equipment or Buildings.
To access more topics go to the Cambridge IGCSE Accounting(0452)/O Level Principles of Accounts(7110) Notes.
