Debentures Benefits for Beginners | How Does Debentures Work
What Is Debenture?
The security provided by companies in order to accumulate money from people is known as debentures or bonds. When banks put forward strict regulations to provide huge loans, companies make debentures for long term development processes.
Differences Between Shares and Debentures?
Debenture is also issued as units just like shares. The owners of debentures are provided with interest by companies for a period of time. This is known as coupon rate. Debentures are meant only for a fixed time period. The debenture holders will not have the right to vote like share holders. They won’t get the profit also. But losses won’t affect them.
What Are Listed Debentures?
Listed debentures are those which are listed in share markets. The marked price of debentures increases when rate of interest starts lowering. Then the depositor can gain profit by selling them. In the same way when rate of interest increases the marked price of debentures decrease.
Types Of Debentures
There are non convertible, convertible, secured and unsecured debentures. Convertible debentures are those which can be changed into shares after a fixed time period. Secured debentures are those which provide claim for depositors on its assets even if the company gets destroyed. Non secured debentures are those which do not provide with any rights or the deposited money to depositors in such cases.
Importance of Debentures
The debenture issue held by Sreeram transport group, a couple of days ago were all sold within three days. The shares kept apart for small scale depositors were applied by double the people. Some companies are accumulating funds with great easiness through debentures while many other companies are facing great difficulties to acquire assets through public issues. Now depositors have started showing more interest for debentures than shares. What may be the reason? Promising great interest is the reason. Sreeram provides a rate of interest of 11.6% for a time period of five years. Following are the answers for the common doubts among people about debentures.
What are Call Option and Put Option?
Call option is the sanction given to companies in order to provide the depositor with the full deposited amount before the time period. This right is used by companies when a required fund is gained by the company or when the company gets money at a low rate of interest from some where else. The debentures with put option provides right to the depositor to return the debentures to the company and get back his money before the time period.
Who All are Benefited by Debentures?
All those who hope to get a safe or fixed income can deposit in it. The interest provided here is greater than that of banks. TDS is not taken from it’s interest.
Are All Debentures Good?
No. Many companies may come forward with debentures. There are both good and bad among them. If deposited in bad schemes you may lose your money.
How to Recognize the Good Debentures?
AAA (CRISIL), LAA+ (ICRA) or AA+ (CARE)
Deposit in only those which have the above rating. If you are depositing for a time period of five years, the best option is secured debentures. There are great possibilities for non convertible debentures of Muthoot finance, Manapuram general finance etc to come to the market soon.
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