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Consider the following statements regarding compulsorily convertible debenture:
- It is a type of bond which must be converted into stock by a specified date.
- It gives higher interest rate compared to the non convertible debentures.
Which of the statements given above is/are correct?
- a)1 only
- b)2 only
- c)Both 1 and 2
- d)Neither 1 nor 2
Correct answer is option 'A'. Can you explain this answer?
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Most Upvoted Answer
Consider the following statements regarding compulsorily convertiblede...
Statement 1: It is a type of bond which must be converted into stock by a specified date.
A compulsorily convertible debenture (CCD) is a type of bond that must be converted into stock by a specified date. Unlike regular debentures, which are debt instruments that pay interest and are redeemed at maturity, CCDs have a mandatory conversion feature. This means that the debenture holder is obligated to convert the debenture into equity shares of the issuing company within a specified time frame.
The conversion ratio is predetermined and is typically based on the market price of the company's stock at the time of conversion. By converting the CCD into equity shares, the debenture holder becomes a shareholder and can participate in the company's future growth and profits.
Statement 2: It gives a higher interest rate compared to non-convertible debentures.
This statement is incorrect. Compulsorily convertible debentures typically offer a lower interest rate compared to non-convertible debentures. This is because CCDs provide the benefit of potential capital appreciation through the conversion into equity shares. The lower interest rate compensates for the potential upside in the form of equity ownership.
The main advantage of CCDs for investors is the potential for higher returns if the company's stock performs well. On the other hand, non-convertible debentures provide a fixed interest income throughout the tenure of the bond.
Conclusion:
In conclusion, statement 1 is correct as compulsorily convertible debentures must be converted into stock by a specified date. However, statement 2 is incorrect as CCDs generally offer a lower interest rate compared to non-convertible debentures. Therefore, the correct answer is option A - 1 only.
A compulsorily convertible debenture (CCD) is a type of bond that must be converted into stock by a specified date. Unlike regular debentures, which are debt instruments that pay interest and are redeemed at maturity, CCDs have a mandatory conversion feature. This means that the debenture holder is obligated to convert the debenture into equity shares of the issuing company within a specified time frame.
The conversion ratio is predetermined and is typically based on the market price of the company's stock at the time of conversion. By converting the CCD into equity shares, the debenture holder becomes a shareholder and can participate in the company's future growth and profits.
Statement 2: It gives a higher interest rate compared to non-convertible debentures.
This statement is incorrect. Compulsorily convertible debentures typically offer a lower interest rate compared to non-convertible debentures. This is because CCDs provide the benefit of potential capital appreciation through the conversion into equity shares. The lower interest rate compensates for the potential upside in the form of equity ownership.
The main advantage of CCDs for investors is the potential for higher returns if the company's stock performs well. On the other hand, non-convertible debentures provide a fixed interest income throughout the tenure of the bond.
Conclusion:
In conclusion, statement 1 is correct as compulsorily convertible debentures must be converted into stock by a specified date. However, statement 2 is incorrect as CCDs generally offer a lower interest rate compared to non-convertible debentures. Therefore, the correct answer is option A - 1 only.
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Consider the following statements regarding compulsorily convertiblede...
Foreign investors from Mauritius, Cyprus and Singapore have been on the receiving end of a number of notices for gains from investment in Compulsorily Convertible Debentures (CCDs) issued by Indian companies.
- It is a type of bond which must be converted into stock by a specified date.
- It is classified as a hybrid security, as it is neither purely a bond nor purely a stock.
- A debenture comes in two forms
- Non-convertible debenture: It cannot be converted into equity shares of the issuing company. Instead, debenture holders receive periodic interest payments and get back their principal at the maturity date, just like most bondholders.
- The interest rate attached to them is higher than for convertible debentures.
- Convertible debentures: May be converted into the company’s equity after a set period of time. That convertibility is a perceived advantage, so investors are willing to accept a lower interest rate for purchasing convertible debentures.
What is a debenture?
- A debenture is a medium- to long-term debt security issued by a company as a means of borrowing money at a fixed interest rate.
- Unlike most investment-grade corporate bonds, it is not secured by collateral.
- It is backed only by the full faith and credit of the issuing company.
Hence only statement 1 is correct.
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Consider the following statements regarding compulsorily convertibledebenture: It is a type of bond which must be converted into stock by a specified date. It gives higher interest rate compared to the non convertible debentures.Which of the statements given above is/are correct?a)1 onlyb)2 onlyc)Both 1 and 2d)Neither 1 nor 2Correct answer is option 'A'. Can you explain this answer?
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