Shares Bonds And Debentures Pdf
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- 8 Key differences between bonds and debentures
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- Difference Between Shares and Debentures
Bonds and debentures are very popular debt instruments. However, many people often confuse the two. Here are eight key areas in which they differ.
8 Key differences between bonds and debentures
Bonds and debentures are very popular debt instruments. However, many people often confuse the two. Here are eight key areas in which they differ. An organisation may need financing at any time. In fact, funds are a basic requirement for setting up or expanding a business. Most companies prefer debt instruments like bonds and debentures to gather these funds. Although both terms are used interchangeably in many countries, the fact is they are distinctly different.
Bonds are probably the most common type of debt instrument used by private corporations, government agencies, and other financial institutions. Bonds are essentially loans that are secured by a physical asset. The holder of the bond is considered to be the lender while the issuer of the bond acts as the borrower. The bondholder, or lender, loans money to the borrower with the promise of repayment at the specified maturity date.
Debentures, on the other hand, are unsecured debt instruments that are not backed by any collateral. Rather, the good credit ratings of a company issuing a debenture act as the underlying security.
Corporations use debentures as a tool to raise funds for various reasons. For instance, a debenture might be issued when a company is undergoing a cash crunch. On the other end of the spectrum, a debenture can also be issued when a company wants to expand its business with a new project. Collateral requirement: Bonds are secured by some kind of collateral.
Debentures, on the other hand, might be secured or unsecured. In most cases, large and reputable public companies issue debentures without any collateral as people are willing to purchase the debenture based solely on the trust that they have in such companies. Tenure: Bonds can be considered as long-term investments and accordingly, the tenure of bonds is generally long.
As for debentures, the tenure is mostly short-term in nature, based on the requirement of the issuing company. Issuing body: Bonds are generally issued by financial institutions, government agencies, large corporations, and the like. Debentures are issued by private companies in almost all cases. Level of risk: Bonds are regarded as safe havens for lenders because they are backed by some form of collateral. Another reason is that corporations that offer bonds are periodically reviewed and rated by credit rating agencies.
Debentures carry a higher risk as they are generally not backed by any kind of collateral. Instead, they are backed solely by the faith and credit of the issuing party. Related: What do market losses mean for mutual funds? Rate of interest: Bonds generally offer lower rates of interest since the stability of repayment in the future is high. Moreover, all bonds are backed by collateral too. In comparison, debentures offer a higher rate of interest as they are mostly unsecured by collateral and are backed only by the reputation of the issuer.
Payment structure: The payment of interest on bonds is on an accrual basis. Lenders are generally paid monthly, semi-annually, or annually. The business performance of the issuing party has no effect on these payments. When it comes to debentures, the interest payment is done on a periodical basis, which can often depend on the performance of the issuing company.
Convertibility into shares: Bonds cannot be converted into equity shares while certain debentures do offer this facility. It has to be noted, however, that convertible debentures pay lower interest rates when compared to other fixed-rate investments.
Priority in case of liquidation: In the event of liquidation of an organisation, bondholders are given priority in repayment as compared to debenture holders. Ultimately, while they may be similar in nature, bonds and debentures are two discrete debt instruments that differ in many ways.
While people often get confused between the two and use them interchangeably, it is important to know the differences. After all, the first step towards avoiding investment risks is to always have the pertinent and correct information at your disposal. All Rights Reserved. Home Other Investments 8 Key differences between bonds and debentures.
Defining bonds and debentures Bonds are probably the most common type of debt instrument used by private corporations, government agencies, and other financial institutions. Conclusion Ultimately, while they may be similar in nature, bonds and debentures are two discrete debt instruments that differ in many ways. Tags : bonds. How and why to monitor your ULIPs after purchase. Financial planning for beginners: A 7 step guide. Why is Life Insurance one of the most preferred Investments with benefits.
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In many respects a debenture is like a share. It can be purchased or sold in the stock-market. Like shares, the market value of a debenture can be used by the holders as collateral security to temporary loans. There are however, important points of difference between a debenture-holder and a share- holder. A debenture-holder is a creditor of the company, but a shareholder is a part-owner of the company. A debenture-holder gets the interest payment regardless of the amount of profit or loss at the stipulated time but the shareholder does not receive any dividend unless the company makes a profit. Even when the company has made a profit, the payment of dividend normally depends upon the discretion of the directors.
Whether it may be a small enterprise, an established company or the Government itself, the need for money to make it run is ever accepted. Borrowing is one of the most common ways of availing the needful fund. There are many ways different ways to borrow money among which Bonds and Debentures are the prominent ones. A bond and debenture both are debt instrument issued by the government or companies. Both of these are fundraising tools for the issuer.
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Difference Between Shares and Debentures
Nowadays, investment in shares and debentures has taken a dominant position in the society, as people of different ages, religion, sex, and race invest their hard earned money, with an aim of getting better returns. While Shares refers to the share capital of the company. It describes the right of the holder to the specified amount of the share capital of the company. Conversely, debenture implies a long term instrument showing the debt of the company towards the external party. It yields a definite rate of interest, issued by the company, may or may not be secured against assets, i.
Companies issue securities to obtain financing. Equity financing is done through selling stock in the company — generally either preferred or common stock, with common stock the most popular type issued. Debt securities include bonds and debentures, which are generally fixed-income securities. The terms "bond" and "debenture" are often used interchangeably.
A share is a part of the owned capital whereas a debenture is a part of borrowed capital.
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