BONDS AND

DEBENTURES

BONDS

BONDS
Abondis an instrument of indebtedness.
It is a debtsecurity
Interest is usually payable at fixed intervals
Thus a bond is a form ofloanor I Owe You
(IOU)
Bonds provides external funds to finance longterminvestments

FEATURES OF BONDS
Principal - Nominal, 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 investing in the bond

TYPES OF BONDS
1. ZERO-COUPON BONDS:
.This is a type of bond that makes no coupon
payments but instead is issued at a considerable
discount to par value
.The issue price of Zero Coupon Bonds is inversely
related to their maturity period.
.These types of bonds are also known as Deep
Discount Bonds.

TYPES OF BONDS
2. HIGH-YIELD BONDS: - High yield (non-investment
grade) bonds are from issuers that are considered to
be at greater risk of not paying interest and/or
returning principal at maturity.

3. CORPORATE BONDS: These are issued by large

corporations and have higher yields because there is
a higher risk of a company defaulting as compared
to government bonds.

TYPES OF BONDS
4. GOVERNMENT BONDS: These are the bonds issued by
government in its own currency. They are usually referred
to as risk-free bonds. Bonds issued by national
governments in foreign currencies are referred to as
sovereign bonds.
5. CONVERTIBLE BONDS: The holder of a convertible bond
has the option to convert the bond into equity.

Convertible bonds may be fully or partly convertible.

TYPES OF BONDS
6. INFLATION-INDEXED (OR INFLATION-LINKED) BOND:
It provides protection against inflation, and is designed
to cut out the inflation risk of an investment.
7. EXTENDIBLE AND RETRACTABLE BONDS:
Extendible and Retractable bonds have no fixed
maturity date.
The maturity period of extendible bonds can be
extended on the demand of the buyer of these bonds
The maturity period of retractable bond can be
reduced and the principal amount returned to the
buyer if he feels so.

TYPES OF BONDS
8. Floating Rate Bonds: Floating Rate Notes are
bonds in which interest rate depends on the
interest rate prevailing in the market.
9. Perpetual Bonds: Perpetual Bonds, which are
also known as the name of Consol, are the bonds
which have no maturity period and keep on
paying interest to the investors regularly.

DEBENTURES

DEBENTURES
Adebentureis a document that either creates a
debt or acknowledges it, and it is a debt without
collateral.
The term is used for a medium - to long - term
debtinstrumentused by large companies to borrow
money.
In some countries the term is used interchangeably
withbond,loan stock ornote.
A debenture = Certificate of loan or a loan bond
Debentures are generally freelytransferableby the
debenture holder.
The interest paid to them is a charge against profit in
the company'sfinancial statements.

FEATURES OF
DEBENTURES
1. Debenture holders of the company are the creditors of the
company and not the owners of the company.
2. Capital raised by way of debentures is required to be
repaid during the life time of the company or at the time
stipulated by the company. Thus, it is not a source of
permanent capital.
3. Return paid by the company is in the form of interest
which is predetermined.

FEATURES OF
DEBENTURES
5. Debentures are very risky from companys point of view
for raising long term funds.
6. Risk on the part of debenture holders is very less.
7. Debenture holders do not carry any voting rights.
8. Debentures are a cheap source of funds from the
companys point of view.

TYPES OF DEBENTURES
1) SECURITY
Secured/ Mortgage
Unsecured
2) REDEMPTION
Redeemable
Irredeemable
3) RECORDS
Registered
Bearer

TYPES OF DEBENTURES
4) CONVERTIBILITY
Convertible
Non-convertible
5) PRIORITY

First

Second

DIFFERENCE
BETWEEN
BONDS AND
DEBENTURES

IN BRIEF
Bonds are more secure than debentures, but the rate
of interest is lower
Debentures are unsecured loans but carries a higher
rate of interest
In bankruptcy, bondholders are paid first, but liability
towards debenture holders is less
Debenture holders get periodical interest
Bond holders receive accrued payment upon
completion of the term
Bonds are more secure as they are mostly issued by
government firms

ADVANTAGES
AND
DISADVANTAGE
S OF BONDS
AND
DEBENTURES

ADVANTAGES OF
DEBENTURES/BONDS
Investors consider debentures/bonds as a relatively
less risky investment
Interest payments are tax deductible.
Floatation Cost
No voting rights therefore no dilution of ownership.
Debenture/bond holders do not participate in
extraordinary earnings of the company. Thus their
payments are limited to interest.
During periods of high inflation, debenture/bond issue
benefits the company. Its obligations of paying
interest and principal, which remain fixed, decline in
real terms.

DISADVANTAGES OF
DEBENTURES/BONDS
Results in legal obligation of paying interest and
principal
Increases the firm's financial leverage
Must be paid at maturity
Contains restrictive covenants