A convertible debenture is a type of long-term debt issued by a company that can be converted into shares of equity stock after a specified period. … This feature gives the bondholder some security that may offset some of the risks involved with investing in unsecured debt.
What is an example of a convertible security?
Example of a Convertible Security
A company with a current common stock price of $5 per share wants to raise some additional capital through a 10-year bond offering. Based on the company’s credit rating, the interest rate is set at 8%. … Any increase in the stock price above $12 results in additional profit.
What do you mean by secured debenture?
Secured debentures meaning: bonds that are issued with collateral. The party issuing the bond offers a piece of property or other assets to states and bondholders along with signed permission for those entities to take possession of the collateral if the issuer doesn’t repay the debt.
What are CCD bonds?
A compulsory convertible debenture (CCD) is a type of bond which must be converted into stock by a specified date. … 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. In effect, an unsecured corporate bond is a debenture.
Why do companies issue convertible debentures?
Companies issue convertible bonds to lower the coupon rate on debt and to delay dilution. A bond’s conversion ratio determines how many shares an investor will get for it. Companies can force conversion of the bonds if the stock price is higher than if the bond were to be redeemed.
Are convertible bonds secured?
Seniority in capital structure – most convertible bonds are senior, unsecured liabilities of the issuer, but some can be structured to be subordinated to other senior unsecured debt, or may be unsecured when an issuer uses significant amounts of secured debt (for example, in the real estate sector).
What are secured bonds?
A secured bond is a type of investment in debt that is secured by a specific asset owned by the issuer. The asset serves as collateral for the loan. If the issuer defaults on the bond, the title to the asset is transferred to the bondholders.
How debentures are secured?
When a debenture is secured, it’s backed up by collateral. In other words, the lender receives a kind of insurance against the loan not being paid back. If the borrower defaults and can’t pay off their loan, the lender can redeem what is owed by acquiring the assets belonging to the borrower.
Are debentures secured in India?
The issue of debenture shall be secured by creation a charge on the assets and properties of the company, value of which shall be substantial enough for the due repayment of the principal amount of the debentures along with the interest on it.
What is the difference between secured and unsecured debentures?
Unsecured debt has no collateral backing. Lenders issue funds in an unsecured loan based solely on the borrower’s creditworthiness and promise to repay. Secured debts are those for which the borrower puts up some asset as surety or collateral for the loan.
What is convertible and nonconvertible debentures?
Definition. Convertible debentures are those type of debentures that can be converted into equity shares of the company. Non-convertible debentures are those debentures that cannot be converted into equity shares of the company. Rate of Interest.
Are convertible debentures a good investment?
A convertible debenture will usually return a lower interest rate since the debt holder has the option to convert the loan to stock, which is to the investors’ benefit. Investors are thus willing to accept a lower rate of interest in exchange for the embedded option to convert into common shares.
Can CCD be bought back?
No legal restriction on interest on CCD. CCD ranks higher than CCPS in terms of liquidation preference. Equity gets the last preference. CCPS and CCDs need to be converted to equity before they can be bought back or extinguished by the Indian company.
Can debentures be secured?
The lack of security does not necessarily mean that a debenture is riskier than any other bond. Strictly speaking, a U.S. Treasury bond and a U.S. Treasury bill are both debentures. They are not secured by collateral, yet they are considered risk-free.
What protects the interest of debenture holders?
To protect the interest of debenture holders, the company appoints Debenture Trustees.
What are the risks of debentures?
The risks associated with investing in debentures and unsecured notes include the following:
- Interest rate risk. The majority of debentures and unsecured notes have a fixed rate of interest and a fixed repayment of capital amount. …
- Credit/default risk. …
- Liquidity risk.