Company debentures are long-term debt instruments issued by businesses to raise funds from the public or institutional investors. Debentures are simply loans obtained by the corporation at a fixed interest rate. They vary from shares in that they do not give ownership of the company but instead reflect a debt obligation.
Key Characteristics of Company Debentures
1) Fixed Interest Rate:
- Debentures provide investors with a fixed rate of interest, generating consistent income in the form of interest payments, which are normally made semi-annually or annually.
2) Maturity Period:.
- Debentures have a fixed maturity period after which the principal amount is returned to the holders.
3) Secured Versus Unsecured:
- Secured Debentures: These securities are backed by the company’s assets and provide investors with security in the event of a default.
- Unsecured Debentures: These are not backed by specific assets and rely only on the issuer’s creditworthiness.
4) Convertability:
- Some debentures are convertible, allowing holders to exchange them into equity shares of the company at a fixed ratio and period, whilst non-convertible debentures remain debt instruments until maturity.
Advantages of Investing in Debentures
1) Regular Income:
- Debentures provide a consistent and secure income stream through regular interest payments, making them appealing to income-oriented investors.
2) Low Risk:
- Secured debentures are regarded less risky than stock investments because they are secured by the company’s assets.
3) Diversification:
- Including debentures in an investing portfolio can help spread risk by balancing the volatility of equity investments against the stability of fixed-income instruments.
Considerations for Investors
1) Credit Risk:
- The biggest risk associated with debentures is credit risk, which is the likelihood that the issuing corporation would fail to make interest payments or return the principal. Before investing, investors should check the issuer’s credit rating.
- Debentures are vulnerable to interest rate changes. Rising interest rates can reduce the market value of old debentures, as future offerings may have higher yields.
3) Liquidity:
- Some debentures may have limited liquidity in the secondary market, making it difficult to sell them before maturity without a considerable price reduction.
Conclusion:
Company debentures are an excellent investment option for people looking for a steady income with potentially lesser risk than equity investments. They provide monthly interest payments and can be an important component of a diverse investment portfolio. However, before investing, investors should thoroughly assess the issuing company’s trustworthiness and consider the associated risks, such as credit and interest rate risks.
