Debentures and their Characteristics

Debentures are a form of long-term debt instrument issued by a company or organization to raise capital for their business. The holders of debentures are creditors or lenders to the company. Debentures have certain characteristics that differentiate them from other forms of debt instruments.

Correct and Incorrect Statements about Debentures

a) A Debenture holder is a lender - Correct Statement

Debenture holders are creditors or lenders to the company who lend money to the company and receive interest on their investment.

b) Debenture is considered as external equity - Incorrect Statement

Debenture is not considered as external equity, as it is a form of debt instrument and not equity. Equity refers to ownership in the company, whereas debentures represent a loan to the company.

c) Debentures can be issued at discount - Correct Statement

Debentures can be issued at a discount, which means that they can be sold for a price lower than their face value. This is done to attract investors and raise capital for the company.

d) Debentures are completely unsafe - Incorrect Statement

Debentures are a form of secured or unsecured debt instrument, which means that they can be secured against the assets of the company. Therefore, debenture holders have a priority claim on the assets of the company in case of default. However, debentures are less safe than other forms of debt instruments like government bonds, as they carry a higher risk of default.

Conclusion

In conclusion, debentures are a form of long-term debt instrument issued by companies or organizations to raise capital. Debenture holders are lenders or creditors to the company who lend money and receive interest on their investment. Debentures can be issued at a discount, and they are not completely unsafe as they can be secured against the assets of the company. However, they carry a higher risk of default compared to other forms of debt instruments.