Scribd
Upload
68 views

Bonds and Debentures

This document discusses bonds, debentures, and their key features. It begins by defining a bond as a debt security where the issuer owes interest and principal to holders. Bonds provide borrowers with funds and holders with fixed interest. Debentures are similar to bonds but are unsecured debt. The document then covers types of bonds and debentures as well as their advantages and disadvantages for issuers.

Uploaded by

Vivek Roy
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
68 views

Bonds and Debentures

This document discusses bonds, debentures, and their key features. It begins by defining a bond as a debt security where the issuer owes interest and principal to holders. Bonds provide borrowers with funds and holders with fixed interest. Debentures are similar to bonds but are unsecured debt. The document then covers types of bonds and debentures as well as their advantages and disadvantages for issuers.

Uploaded by

Vivek Roy
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 19

BONDS AND

DEBENTURES

SYBBA B: GROUP 5
ABHILASHA MOHAN RAM B034
ROHAN NEGI B035
DHAWAL PASAD B037
VARUN RAJDEV B038
KRATI RATHI B039
RAGHAV SACHDEVA B040
ASHISH SANTHALIA B041

BONDS

abondis an instrument of indebtedness of the bond


issuer to the holders.
It is a debtsecurity, under which the issuer owes the
holders a debt and, depending on the terms of the bond,
is obliged to pay theminterest(thecoupon) and/or to
repay the principal at a later date, termed thematurity
Interest is usually payable at fixed intervals (semiannual,
annual, sometimes monthly).
Thus a bond is a form ofloanorIOU: theholderof the
bond is the lender (creditor), theissuerof the bond is
the borrower (debtor), and thecouponis the interest.
Bonds provide the borrower with external funds to
finance long-terminvestments, or, in the case
ofgovernment bonds, to finance current expenditure.

COMPARISON WITH EQUITY

Bonds andstocksare bothsecurities, but the


major difference between the two is that
(capital) stockholders have anequitystake in
the company (i.e. they are owners), whereas
bondholders have a creditor stake in the
company (i.e. they are lenders).
Another difference is that bonds usually have
a defined term, or maturity, after which the
bond is redeemed, whereas stocks may be
outstanding indefinitely. An exception is an
irredeemable bond, such asConsols, which is
aperpetuity, i.e. a bond with no maturity

DEBENTURES

Adebentureis a document that either creates a debt or acknowledges


it, and it is a debt without collateral.
Incorporate finance, 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 is thus like a certificate of loan or a loan bond evidencing
the fact that the company is liable to pay a specified amount with
interest and although the money raised by the debentures becomes a
part of the company's capital structure, it does not becomeshare
capital.
Debentures are generally freelytransferableby the debenture holder.
Debenture holders have no rights to vote in the company's general
meetings of shareholders, but they may have separate meetings or votes
e.g. on changes to the rights attached to the debentures. The interest
paid to them is a charge against profit in the company'sfinancial
statements

BONDS
It

is a debt security, under which the issuer


owes the holders a debt and, depending on
the terms of the bond, is obliged to pay them
interest (the coupon) and/or to repay the
principal at a later date, termed the maturity.
Interest is usually payable at fixed intervals
(semiannual, annual, sometimes monthly).

FEATURES OF A BOND
Principal
Nominal, principal, par or face amount the amount on which the issuer
pays interest, and which, most commonly, has to be repaid at the end of the
term
Maturity
The issuer has to repay the nominal amount on the maturity date. As long as
all due payments have been made, the issuer has no further obligations to the
bond holders after the maturity date. The length of time until the maturity date
is often referred to as the term or tenor or maturity of a bond.
Coupon
The coupon is the interest rate that the issuer pays to the bond holders.
Usually this rate is fixed throughout the life of the bond. Interest can be paid at
different frequencies: generally semi-annual, i.e. every 6 months, or annual
Yield
The yield is the rate of return received from investing in the bond

TYPES OF BOND
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. For example, let's say a
zero-coupon bond with a $1,000 par value and 10 years to maturity is
trading at $600; you'd be paying $600 today for a bond that will be worth
$1,000 in 10 years.

The issue price of Zero Coupon Bonds is inversely related to their


maturity period, i.e. longer the maturity period lesser would be the issue
price and vice-versa. These types of bonds are also known as Deep
Discount 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. As a result, the issuer will offer a higher yield than a similar bond of
a higher credit rating and, typically, a higher coupon rate to entice investors
to take on the added risk.

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.

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 (in the same value as of the bond) of the issuing firm (borrowing
firm) on pre-specified terms.

Convertible bonds may be fully or partly convertible. For the part of the
convertible bond which is redeemed, the investor receives equity shares
and the non-converted part remains as a bond.

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.

While 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.

8. Floating Rate Bonds:

Floating Rate Notes are bonds in which interest rate depends on the interest
rate prevailing in the market. The interest rate paid to the bondholder at
regular intervals comprises of the interest rate prevailing in the market and
spread, which is a rate that is fixed when the prices of the bond are being
fixed and it remains constant till the maturity period of the bond.

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. The issuer of Perpetual Bonds is not required to
redeem these bonds. They are generally treated as equity and not as loan
/ debt.

Some other Types of bonds:


Asset Backed Securities, subordinated bonds, Bearer Bonds,
Municipal Bonds, Lottery Bonds, War Bonds.

TYPES OF
DEBENTURES

SECURITY
. Secured/ Mortgage
. Unsecured
1.

2. REDEMPTION
. Redeemable
. Irredeemable

3. RECORDS
Registered
Bearer
4. CONVERTIBILITY
Convertible
Non-convertible
5. PRIORITY
First
Second

ADVANTAGES OF
DEBENTURES/BOND
S

Investors consider debentures/bonds as a


relatively less risky investment, therefore
it requires a lower rate of return.

Interest payments are tax deductible.

The floatation costs on debentures/bonds


is usually lower than floatation costs on
common shares

No voting rights therefore no dilution of


ownership.

Debenture/bomd 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.

DISADVANTAGE OF
DEBENTURES/BOND
S

Their issue results in legal obligation of paying


interest and principal, which, if not paid can
force the company into liquidation.

Their issue increases the firm's financial leverage


and reduces its ability to borrow in future.

They must be paid at maturity and therefore at


some point, it involves substantial cash outflows.

They may contain restrictive covenants which may


limit the firm's operating flexibility in future.

You might also like