bonds and debentures - new
TRANSCRIPT
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BONDS AND
DEBENTURES
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BONDS
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BONDS
• A bond is an instrument of indebtedness.
• It is a debt security
•Interest is usually payable at xed intervals
• Thus a bond is a form of loan or “I Owe You
IO!"#
• $onds provides external funds to nance lon%&
term investments
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FEATURES OF BONDS
• Principal - 'ominal( principal( par or face
amount
• Maturity - The issuer has to repay the nominal
amount on the maturity date.
• Coupon - The coupon is the interest rate that
the issuer pays to the bond holders.
• Yield - The yield is the rate of return received
from investin% in the bond
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TYPES OF BONDS
! "ERO-COUPON BONDS#
. This is a type of bond that ma)es no coupon
payments but instead is issued at a considerable
discount to par value
. The issue price of *ero +oupon $onds is inversely
related to their maturity period.
. These types of bonds are also )nown as ,eep
,iscount $onds.
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TYPES OF BONDS
$! %&'%-Y&E(D BONDS# - -i%h yield non&investment
%rade" bonds are from issuers that are considered to
be at %reater ris) of not payin% interest andor
returnin% principal at maturity.
)! CORPORATE BONDS# These are issued by lar%e
corporations and have hi%her yields because there is
a hi%her ris) of a company defaultin% as compared
to %overnment bonds.
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TYPES OF BONDS
*! 'O+ERNMENT BONDS# These are the bonds issued by
%overnment in its own currency. They are usually referred
to as ris)&free bonds. $onds issued by national
%overnments in forei%n currencies are referred to as
soverei%n bonds.
,! CON+ERT&B(E BONDS# The holder of a convertible bond
has the option to convert the bond into e/uity. – +onvertible bonds may be fully or partly convertible.
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TYPES OF BONDS
! &NF(AT&ON-&NDE.ED /OR &NF(AT&ON-(&N0ED1 BOND# – It provides protection a%ainst in0ation( and is desi%ned
to cut out the in0ation ris) of an investment.
2! E.TEND&B(E AND RETRACTAB(E BONDS# – 1xtendible and 2etractable bonds have no xed
maturity date.
– The maturity period of extendible bonds can beextended on the demand of the buyer of these bonds
– The maturity period of retractable bond can bereduced and the principal amount returned to thebuyer if he feels so.
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TYPES OF BONDS
3. 4loatin% 2ate $onds5 4loatin% 2ate 'otes are
bonds in which interest rate depends on the
interest rate prevailin% in the mar)et.
6. 7erpetual $onds5 7erpetual $onds( which are
also )nown as the name of +onsol( are the bonds
which have no maturity period and )eep onpayin% interest to the investors re%ularly.
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DEBENTURES
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DEBENTURES
• A debenture is a document that either creates adebt or ac)nowled%es it( and it is a debt withoutcollateral.
• The term is used for a medium & to lon% & term
debt instrument used by lar%e companies to borrowmoney.
• In some countries the term is used interchan%eablywith bond( loan 3toc4 or note.
• A debenture 8 +erticate of loan or a loan bond• ,ebentures are %enerally freely transferable by the
debenture holder.
• The interest paid to them is a char%e a%ainst prot in
the company9s nancial statements!
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FEATURES OFDEBENTURES
:. ,ebenture holders of the company are the creditors of the
company and not the owners of the company.
;. +apital raised by way of debentures is re/uired to be
repaid durin% the life time of the company or at the time
stipulated by the company. Thus( it is not a source of
permanent capital.
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FEATURES OFDEBENTURES
=. ,ebentures are very ris)y from company>s point of view
for raisin% lon% term funds.
?. 2is) on the part of debenture holders is very less.
@. ,ebenture holders do not carry any votin% ri%hts.
3. ,ebentures are a cheap source of funds from the
company>s point of view.
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TYPES OF DEBENTURES
1 SECUR&TY
– ecured Bort%a%e
– !nsecured
$1 REDEMPT&ON – 2edeemable
– Irredeemable
)1 RECORDS
– 2e%istered
– $earer
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TYPES OF DEBENTURES
*1 CON+ERT&B&(&TY
– +onvertible
– 'on&convertible
,1 PR&OR&TY
– 4irst
– econd
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D&FFERENCEBET5EEN
BONDS ANDDEBENTURES
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&N BR&EF
• $onds are more secure than debentures( but the rateof interest is lower
• ,ebentures are unsecured loans but carries a hi%herrate of interest
• In ban)ruptcy( bondholders are paid rst( but liabilitytowards debenture holders is less
• ,ebenture holders %et periodical interest
• $ond holders receive accrued payment upon
completion of the term• $onds are more secure as they are mostly issued by
%overnment rms
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AD+ANTA'ESAND
D&SAD+ANTA'E
S OF BONDSAND
DEBENTURES
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AD+ANTA'ES OFDEBENTURES6BONDS
• Investors consider debenturesbonds as a relativelyless ris)y investment
• Interest payments are tax deductible.
• 4loatation +ost
• 'o votin% ri%hts therefore no dilution of ownership.
• ,ebenturebond holders do not participate inextraordinary earnin%s of the company. Thus theirpayments are limited to interest.
• ,urin% periods of hi%h in0ation( debenturebond issuebenets the company. Its obli%ations of payin%interest and principal( which remain xed( decline inreal terms.
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D&SAD+ANTA'ES OFDEBENTURES6BONDS
• 2esults in le%al obli%ation of payin% interest and
principal
• Increases the rm9s nancial levera%e
• Bust be paid at maturity
• +ontains restrictive covenants