How Debentures work for us?

Mahawawtta · 1 How Debentures work for us? Wed Oct 23, 2013 10:53 am

Mahawawtta

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Dear Friends

I am interest in investing few monies in debentures as well. But no idea how it works and what are the benefits we get. If we have any experts among us I really appreciate your valuable comments please.

K.Haputantri · 2 Re: How Debentures work for us? Wed Oct 23, 2013 2:16 pm

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Debenture
From Wikipedia, the free encyclopedia

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Debenture is a document that either creates a debt or acknowledges it, and it is a debt without collateral. In corporate finance, the term is used for a medium- to long-term debt instrument used by large companies to borrow money. In some countries the term is used interchangeably with bond, loan stock or note. 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 become share capital.^[1] Senior debentures get paid before subordinate debentures, and there are varying rates of risk and payoff for these categories.

Debentures are generally freely transferable by 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's financial statements.

Gaudente · 3 Re: How Debentures work for us? Wed Oct 23, 2013 2:22 pm

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to invest in debentures you need to apply at the offering (next one is Arpico Finance) following instructions printed on application form, or you can buy on secondary market for which I think the only broker with a debenture trading license is First Capital

knockknobbler · 4 Re: How Debentures work for us? Wed Oct 23, 2013 5:52 pm

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Mahawawtta wrote:Dear Friends

I am interest in investing few monies in debentures as well. But no idea how it works and what are the benefits we get. If we have any experts among us I really appreciate your valuable comments please.

you don't need any expert opinion on this.
Just look at the basic terms - rate of interest and duration
If you invest , you will get your capital and interest at the end of that period, just like a fixed deposit.
Unlike the FD with a Bank, here the risk factor is the credibility of debenture Issuer. Whether the Issuer will be in a position to honor the commitment , at the end of the period ? That you have to assess and make a decision. .

That's the reason debenture interest is higher than Bank FD rate for a comparative period.

Oracle797 · 5 Re: How Debentures work for us? Wed Oct 23, 2013 10:38 pm

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And of course you can trade the debenture..If you want. Most of the stock brokers will provide that service. But the thing is sellers are less compared to the buyers.

In the secondary market it will trade at a premium if the current interest rates are low.

Its better to to do some studies if you want to focus on trading.

Before you invest in debentures its always better to look at their business and sustainability.Do you own research before you invest...

Chinwi · 6 Re: How Debentures work for us? Wed Oct 23, 2013 11:15 pm

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Almost all the recent debentures were unsecured.
That means if the company failed you will get nothing.
I mean not only the interest, your initial capital too is lost.

Hence study carefully about the issuing company.

If you buy a secured debenture the fund or bank guaranteed the issue will pay you if the company failed.

Mahawawtta · 7 Re: How Debentures work for us? Thu Oct 24, 2013 8:27 am

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Dear Friends, Thank you very much for your valuable comments, I believe further study is a must as per your comments, hence I decided to postpone my interest for few months . Once again thank you so much

hettdas · 8 Re: How Debentures work for us? Thu Oct 24, 2013 9:00 am

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Chinwi wrote:Almost all the recent debentures were unsecured.
That means if the company failed you will get nothing.
I mean not only the interest, your initial capital too is lost.

Hence study carefully about the issuing company.

If you buy a secured debenture the fund or bank guaranteed the issue will pay you if the company failed.

Hi Chinwi,
Are there any regulators behind those debentures? Otherwise any bad company can cheat debenture holders. I think debenture holders get priority when a company liquidates.
But the debentures must be called as "senior"

Gaudente · 9 Re: How Debentures work for us? Fri Oct 25, 2013 9:16 pm

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Unless subordinated, debentures rank pari passu with other unsecured creditors in the event of bankruptcy, the only difference from depositors being they do not enjoy the government guarantee up to 200,000 rupees.
Recovery in the event of bankruptcy depends on the company balance sheets, might be zero or might even be 100% + interest. Please consider however that all quoted debentures are issued by quoted companies , whose shares are of course more at risk of respective debentures (I mean , if you are comfortable owning shares of - for example - Commercial Credit , it would be absurd to be afraid to buy the debentures issued by the same company)

lakshanraj · 10 Re: How Debentures work for us? Sun Oct 27, 2013 7:17 pm

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Gaudente wrote:Unless subordinated, debentures rank pari passu with other unsecured creditors in the event of bankruptcy, the only difference from depositors being they do not enjoy the government guarantee up to 200,000 rupees.
Recovery in the event of bankruptcy depends on the company balance sheets, might be zero or might even be 100% + interest. Please consider however that all quoted debentures are issued by quoted companies , whose shares are of course more at risk of respective debentures (I mean , if you are comfortable owning shares of - for example - Commercial Credit , it would be absurd to be afraid to buy the debentures issued by the same company)

^ very good example! Razz

Chinwi · 11 Re: How Debentures work for us? Sun Oct 27, 2013 9:04 pm

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But, remember liquidity.

In an escape operation, it will be easier with high liquid instruments.

Generally shares are liquid than Debentures.
Just an idea.

Gaudente · 12 Re: How Debentures work for us? Wed Oct 30, 2013 5:49 pm

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This is a spot on observation , should things go awry selling off a stock is surely easier than selling an illiquid debenture , at least until a decent secondary market for debentures is created. We should buy only debentures we are comfortable to hold until maturity and issued by companies we trust for the long term.