Commerce:Debentures

Debentures

• Are loan capital or money borrowed from financial institutions and individuals.
• Earn interest at a fixed rate.
• Interest is paid whether or not a company has made profits.
• Debentures are creditors to the company.
• A safe form of investment.
• May be secured against the company’s assets.
• Can be naked, floating, mortgaged or redeemed debentures.
• Debenture-holders can force a company into liquidation if interest is not paid.

Types of debentures

Naked debentures

• issued without any property attached to them.
• Not a very safe of investment.

Mortgaged Debentures

• Are secured against company assets e.g. buildings.
• Is a safe form of investment to the loan lender.
• In case of liquidation of a company:
• the attached property will be sold and
• the proceeds thereof are used to settle the debenture dents.

Redeemable Debentures

• Are issued for a fixed period of time.
• Can be bought back by the company after this time lapses.
• The amount borrowed by the company can be repaid on or before a fixed date.

Irredeemable debentures

• Cannot be bought back.
• The amount of money borrowed will only be paid back after the company is liquidated.

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