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Why are Debentures Issued? Video Lecture | Accounting for Grade 12

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FAQs on Why are Debentures Issued? Video Lecture - Accounting for Grade 12

1. Why are debentures issued?
Ans. Debentures are issued by companies to raise long-term funds from the public or financial institutions. They are a form of borrowing for the company, and the funds raised through debentures can be used for various purposes like expansion, research and development, working capital requirements, or debt refinancing.
2. What are the advantages of issuing debentures?
Ans. There are several advantages of issuing debentures for companies. Firstly, debentures provide an alternative source of long-term funding without diluting the ownership stake of existing shareholders. Secondly, debentures offer a fixed rate of interest to the debenture holders, which can be attractive for investors seeking stable income. Additionally, issuing debentures can also enhance the company's creditworthiness and improve its borrowing capacity in the future.
3. What is the difference between debentures and shares?
Ans. Debentures and shares are both financial instruments used by companies to raise funds, but they have some key differences. Shares represent ownership in the company, while debentures represent debt. Shareholders become part owners of the company and have voting rights, while debenture holders are creditors and have no ownership rights. Furthermore, dividends are paid to shareholders based on profitability, while debenture holders receive fixed interest payments.
4. Are debentures secure investments?
Ans. Debentures can be considered relatively secure investments compared to some other forms of investments. They are backed by the company's assets and have a fixed rate of interest, providing a predictable income stream for debenture holders. However, it is important to assess the creditworthiness of the issuing company before investing in debentures, as the risk of default can vary depending on the financial health of the company.
5. Can debentures be converted into shares?
Ans. Yes, some debentures come with an option of conversion into shares. These are known as convertible debentures. The conversion feature allows debenture holders to convert their debt into equity shares of the company at a predetermined ratio and at a specified time. This provides an opportunity for debenture holders to participate in the company's growth and potentially benefit from capital appreciation in the value of the shares.
57 videos|79 docs|68 tests
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