Saturday, January 29, 2011

interpreting modifiable debentures

By Deann Warren


Did you know that you can earn money through bonds as well as debentures? But of course, you have to understand first what debentures are and how they work. You also have to check your risk appetite so that you know if you can handle the risk profile of a debenture. The first rule in investing is never to lose money.

Fixed interest investments are for those who want to get regular fixed payments. In exchange for the consistent payments, they sacrifice capital growth potentials. Fixed interest instruments are bonds, debentures, and certificates of deposits. The return is higher if you invest in the tool for a long period of time. The longer the time horizon, the greater the interest rate you will receive.

Debentures are a good tool for companies who need extra finances for their projects and investments. In exchange, they provide a good return to investors of their debentures. As long as the company has good credit standing and are doing well financially, debenture holders do not have much to worry about.

With debentures, the company is able to get money through investments and the people who invest can get monetary profit in terms of interest. Like any other fixed interest investment, a debenture is also a fixed long term loan amount with an upfront interest rate so you are going to be giving that fund for that specified time period.

Debentures are classified as an unsecured form of bonds. Most bonds are secured because they have collateral or an asset attached to them so investors are assured that their capital is secured. Debentures are a different story. They are unsecured because there are no collaterals or assets backing them. Since it's high risk, only those who have a high appetite for risk invest in debentures.

Just like any other loan, the debenture investor will receive the money they initially loaned in full when the maturity date arrives. As for the interest payments, they can be received on the date of maturity or they can be paid to the investor on a regular basis. Debentures are usually issued by finance companies and the money is then given to those people who are unable to get a regular loan for some reason.

The risks involved are the same as any investment or loan, but in the case of debentures, the higher the risks, the larger the returns. This kind of fixed interest investment really does pay a lot higher than any other form of investment like bonds and such. The debenture holder can easily transfer the debenture if they choose to. And while they may not have any say in the workings of the company and they are not treated like usual share holders, they can have talks with the company for debenture rights.

Two types of debentures exist: Convertible and Non-Convertible. Between the two, convertible debentures have a lower return because of the convertibility feature. Convertibility means that the debenture can be changed into shares after a prescribed period. Non-Convertible debentures carry a higher return because there is no feature that will allow it to be converted into company shares which will give you higher gains.




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