A corporation or company generally borrow money by means of issuing debentures or bonds. A debenture or bond is a written acknowledgment by a company or corporation of a loan made to it. It is issued to money lenders under the seal of the corporation. It contains a contract for the repayment of the principal sum at a specified date and the payment of interest at a fixed rate until the principal sum is repaid.
Types of debentures or bonds:
The following are the various kinds of debentures that may be issued. by a corporation.
Simple or naked debentures or bonds:
Simple debentures are those which carry no security as to payment of interest or repayment of the principal sum. The holders of these are considered insecure, so these are not popular in present days. Simple debentures are also cal!ed as naked debentures or bonds.
Mortgage debentures or bonds:
Mortgage debentures are those which are secured by a charge on the assets of the corporation, such as plant, machinery equipment, land and building. Mortgage debentures are of the following two types:
- First mortgage debentures
First, mortgage debentures are those the holders of which have first claim on the assets charged.
- Second mortgage debentures
Second mortgage debentures are those the holders of which have a second claim on the assets charged.
Bearer debentures or bonds:
The amount of bearer debentures is payable to hearer. They are negotiable instruments and are transferable by mere delivery.
Registered debentures or bonds:
The name and address of these debenture holders are recorded in the books of the corporation. Transfer of these debentures must be registered In the books of the corporation as in the case of shares. Interest is paid to registered holders.
Redeemable debentures or bonds:
These are debentures which are repayable at the end of a specified period. These are issued subject to the condition that the corporation shall redeem them on specified date. These debentures are very common now-a-days.
Irredeemable debentures or bonds:
These debentures are never repayable during the existence of the corporation i.e., repayable on liquidation of the corporation.
Convertible debentures or bonds:
These debentures may be converted into ordinary shares or preference shares of the company. This option is given to debenture holder for the period mentioned in the conditions of the issue.