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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...
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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Community 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.
Statement 2: It gives higher interest rate compared to the non-convertible debentures.
Explanation:
Compulsorily Convertible Debentures (CCDs):
Compulsorily Convertible Debentures (CCDs) are a type of debt instrument issued by companies to raise funds. These debentures have a mandatory conversion feature, which means that they must be converted into equity shares by a specified date. The conversion is usually done at a predetermined price or as per the terms and conditions mentioned in the debenture agreement.
Statement 1: It is a type of bond which must be converted into stock by a specified date.
This statement is correct. Compulsorily Convertible Debentures (CCDs) are indeed a type of bond that must be converted into stock (equity shares) by a specified date. The conversion is mandatory and is usually done at a predetermined price or as per the terms mentioned in the debenture agreement. If the debentures are not converted by the specified date, the company may have the right to call back the debentures or take any other action as per the agreement.
Statement 2: It gives a higher interest rate compared to non-convertible debentures.
This statement is incorrect. Compulsorily Convertible Debentures (CCDs) do not necessarily offer a higher interest rate compared to non-convertible debentures. The interest rate offered on CCDs depends on various factors such as the creditworthiness of the issuer, prevailing market conditions, and the terms and conditions of the debenture agreement. The interest rate on CCDs can be higher or lower than that of non-convertible debentures depending on these factors.
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 the interest rate on CCDs can vary and may not necessarily be higher than that of non-convertible debentures. Therefore, the correct answer is option 'A' - 1 only.
Statement 2: It gives higher interest rate compared to the non-convertible debentures.
Explanation:
Compulsorily Convertible Debentures (CCDs):
Compulsorily Convertible Debentures (CCDs) are a type of debt instrument issued by companies to raise funds. These debentures have a mandatory conversion feature, which means that they must be converted into equity shares by a specified date. The conversion is usually done at a predetermined price or as per the terms and conditions mentioned in the debenture agreement.
Statement 1: It is a type of bond which must be converted into stock by a specified date.
This statement is correct. Compulsorily Convertible Debentures (CCDs) are indeed a type of bond that must be converted into stock (equity shares) by a specified date. The conversion is mandatory and is usually done at a predetermined price or as per the terms mentioned in the debenture agreement. If the debentures are not converted by the specified date, the company may have the right to call back the debentures or take any other action as per the agreement.
Statement 2: It gives a higher interest rate compared to non-convertible debentures.
This statement is incorrect. Compulsorily Convertible Debentures (CCDs) do not necessarily offer a higher interest rate compared to non-convertible debentures. The interest rate offered on CCDs depends on various factors such as the creditworthiness of the issuer, prevailing market conditions, and the terms and conditions of the debenture agreement. The interest rate on CCDs can be higher or lower than that of non-convertible debentures depending on these factors.
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 the interest rate on CCDs can vary and may not necessarily be higher than that of non-convertible debentures. Therefore, the correct answer is option 'A' - 1 only.
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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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