A debenture is a debt tool used by a company that supports long term loans. Here, the fund is a borrowed capital, which makes the holder of debenture a creditor of the business. Debentures are both redeemable and unredeemable and free transferable with a fixed interest rate. It is unsecured and sustained only by the issuer’s credibility.
Unlike shareholders, debenture holders who are a creditor of the company do not hold any voting rights. Few types of debenture are mentioned below.
- Secured Debentures
- Unsecured Debentures
- Convertible Debentures
- Non-convertible Debentures
- Registered Debentures
- Bearer Debentures
The issue of Debentures are similar to the issues of shares by an enterprise. Here, the money can be accumulated either in a lump sum or in instalments. The accounting treatment of the two concepts are considerably similar. The debentures can be either issues or cash. Often issue or circulation of debentures is done as collateral security.
Advantages of Debenture
There are many advantages of the debenture, and the most important are as follows.
- Debenture has a lesser risk with a fixed return. Therefore, most of the individual or investors prefer to invest in it.
- The firm does not include profits in the debenture.
- The holder of the debenture does not have any voting rights, but it does not reduce their authority over management.
- The issue of debentures is relevant when the earnings and sales are stable.
- Financing through debenture is economical as compared to equity capital, or cost preference. As the interest applied is tax-deductible.
Dis-advantages of Debenture
Here are a few disadvantages of debenture
- Each firm has a particular borrowing limit. With debenture burrowings, the borrowing limit of a firm in the future decreases.
- For redeemable debenture, an organization have to repay the amount on a designated time, even if the business financial status is not stable.
- It establishes an indefinite implication on firm earnings. Therefore, it creates risk when the company’s revenues are not stable.
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