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Types of Debentures

 

Types of Debentures

Debenture is a kind of bond or a debt instrument which is not secured by collateral. Companies or government issue debentures to raise capital and funds requirement for their organization. Companies borrow money at a fixed rate of interest via debentures.

Types of Debentures

There are several factors which decides the type of debenture, these factors include company’s objective, requirements, security, convertibility, tenure etc.

1. Based on Convertibility
• Convertible Debentures: In this type of debentures, investors have the right to convert their debenture holdings into equity shares of that company. It means these debentures can be converted into equity shares.
• Non-convertible Debentures: This type of debentures cannot be converted into equity shares.

2. Based on Security
• Secured Debentures: Secured debentures are the debentures where investors can liquidate the asset if needed. This type of debenture is secured by some set of assets.
• Unsecured Debentures: Unsecured debentures are the debenture in which investors cannot liquidate the asset. It means No protection is offered to investors even if the company is not able to pay the principal amount on the due date.

3. Based on Performance
• Redeemable Debentures: Redeemable debentures are the debentures in which the date of redemption of the debentures are pre decided which the company has to return the principal amount before the date of
• Irredeemable Debentures: Irredeemable debentures does not have any specified date of redemption. In this, redemption is made using liquidation of the issuing body. In irredeemable debentures, redemption is also done by the agreement between the issuing body and the investor.

4. Based on Record
• Registered Debenture: This type of debenture is registered with the issuing company. All the details of investors are registered with the company. To transfer Registered debentures from one holder to another, investors have to inform the issuing company regarding the same to get it updated in their records.
• Unregistered Debentures: It is also known as Bearer Debentures. Details of investors are not registered with the issuing company in case of unregistered debentures. Such debentures are easily transferrable from one debenture holder to another.

5. Based on Priority
• First Mortgaged Debentures: These debentures have first preference among all other debentures issued by the company. This preference is helpful at the time of liquidation of the company, which means first mortgaged debentures holders is prioritized to claim the company’s assets.
• Second Mortgaged Debentures: These debentures have second preference as it is preferred after first mortgaged debentures.

6. Based on Interest Rate
• Fixed - Rate Debentures: These debentures have fixed rate of interest during the whole tenure.
• Floating - Rate Debentures: These debentures have floating rate of interest whose interest rate fluctuates with the market conditions.


Also Read: Difference Between NCDs and Bonds


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