Debentures Advantages And Disadvantages | What are Debentures?, Meaning, Types, Features and Benefits

Debentures Advantages and Disadvantages: Debentures are a popular investment option with many benefits and drawbacks. This financial instrument is often used in the stock market to help companies raise capital when they need it. They are long-term loans that offer higher rates of return than shares of stock. A company takes out a debenture and then sells it to investors.

Generally, debenture will have an interest rate that is comparable to stocks. Investors who purchase these debentures can expect a stream of payments over a certain time period or until the company pays off the loan. In other words, debentures are a type of loan, similar to a corporate bond or a mortgage. They are only granted to companies that have enough assets and earnings. Debenture holders receive interest but don’t have any voting rights. The company is responsible for all the debt that is taken out on the debenture, not the holder. In this article, we’ll explore what debentures are in detail, and their advantages and disadvantages.

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Advantages of Debentures

Debentures have several advantages over other types of debt. Some of the most obvious are:

  • Secured investments – Debentures are investments that provide borrowers a low-risk opportunity to receive annual returns. Borrowers pay upfront and then receive interest payments at fixed intervals. When the loan is paid back, investors will receive the original amount of their investment with no loss. In other words, debentures generally have a more stable and consistent return than other investments, and the risk is also lower.
  • Fixed return – Debentures are usually purchased with the intent to produce a fixed return. This means that the investor will receive a specified amount of cash back if the investment is held for a specific period of time. The advantages of purchasing a debenture include fixed returns, tax benefits, and the potential for higher gains under certain predetermined conditions.
  • Stable prices when compared to shares – Debenture shares are more stable than stock shares because they don’t fluctuate in price. Instead, the value of the debentures is set at a certain percentage of the company’s total capitalization. For example, if a company has $1 billion in capital and there are 100 million debentures that were issued, then each one would be worth $10.
  • No interference with management – As previously stated, debentures are debt instruments that are issued by a company to investors. They allow the company to raise capital without diluting its stock value. And most importantly, debenture holders have no voting rights and cannot interfere with management decisions.
  • Lower rate of interest than shares – Debentures are bonds that are issued by a company and traded on the stock market. The company must issue the debenture, but with interest rates lower than share prices. This makes it a good investment for companies looking to borrow money.
  • Regular source of income – Debentures is an investment that provides regular income. Unlike stocks, they don’t fluctuate in value and generate a set amount of income for their owners each pay period. Debenture holders receive interest on the total face value of the debenture. They can be purchased at banks, brokers or through brokerages that specialize in this type of investment.

Disadvantages of Debentures

As discussed, debentures are a type of debt that offers investors a more stable return than other forms of investment, but also come with their own risks. Following are the disadvantages of debentures:

  • Debentures holders have to be paid irrespective of company profit or loss – If a company goes bankrupt, debenture holders will have to be paid in full before other creditors receive any money. This financial cumulative burden can make a bad situation even worse.
  • No right to participate in company management – Shareholders in many companies have rights to participate in company management, but debenture holders do not. The primary disadvantage to this arrangement is that they are excluded from much of the decision-making process and they shouldn’t expect any additional payments from profits either.
  • Debenture holders cannot claim profits – Debenture holders are people who purchase a loan from a business as an investment and allow the business to use their money for a certain period of time. In return, the holder of the Debenture experience almost no risk since they receive regular interest payments on it. However, this also means debenture holders are not entitled to any profits of the company.
  • Affects Creditworthiness – Any default on payments to the debenture holders has the potential to severely affect the creditworthiness of a company.
  • It may be financially unfeasible – The payment of interest and principle might become unsustainable in the long run for some organizations.

Comparison Table for Advantages and Disadvantages of Debentures

Following are the advantages and disadvantages of Debentures:

Investments are securedDebentures holders have to be paid irrespective of company’s financial condition
Returns are fixedDebenture holders can’t participate in management like shareholders
Prices are stable when compared to sharesProfits cannot be claimed by debenture holders
Debenture holders do not interfere with managementMay affect credit worthiness
A very regular source of incomeNot financially feasible for some countries

Conclusion on Debentures – Advantages And Disadvantages

Debentures are a popular investment vehicle that offers investors a variety of advantages and disadvantages. Advantages include the ability to lock in an agreed-upon interest rate, as well as the security of knowing that you will receive your principal back at some point. Disadvantages may include high initial borrowing costs, limited liquidity, and susceptibility to default. It is important to consult with a financial advisor before making any decision about whether or not debentures are right for you.

FAQs on Advantages And Disadvantages of Debentures

Question 1.
What are Debentures?

Debentures are a type of security that is issued by a company. They are similar to bonds, but they are not backed by the government. Instead, they are backed by the company’s assets. Debentures can be bought and sold on the stock market like any other type of security. They typically have a longer-term than bonds, and they offer investors a fixed rate of return.

Question 2.
What are the advantages and disadvantages of Debentures?

Debentures are a financial instrument that allows companies to raise money. The advantages of debentures include that they are relatively low-risk and easy to issue, as well as providing a fixed return. However, the major disadvantages are that debenture holders do not have rights to the company’s profit and the company will be forced to pay debenture holders even if the company is under loss or going bankrupt.

Question 3.
Why are Debentures important?

Debentures are a type of debt that is issued by a company to raise money. They are a popular way for companies to raise money because they offer investors a fixed return on their investment. This means that the debenture holder will receive the same amount of money each and every month, regardless of how well or how poorly the company performs. Debentures also have less risk than other forms of debt, since they do not require the company to pay back the principal until it matures.

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