Some people have probably never even heard of the term debenture before, but it will be defined in this article. We have to first understand how companies offer and sell bonds to the public. This process is somewhat easier to understand and simply takes a little bit of education to comprehend.
Whenever a company needs more money to help it function and grow, it will sometimes try to sell company bonds to people. A company bond is simply an amount of money that the company borrows from you to use on various business related expenditures. In return for using your money, the company promises to pay back the full amount of money they initially borrowed plus interest over an extended period of time.
Companies also provide things that offer you financial protection in cases they are unable to pay back the amount of borrowed money and interest in the form of immediate cash. Some of this protection comes in the form of assets such as company stock or debentures, which are basically promises that the company will eventually pay you back. Company bonds can be a great thing to invest in, but they also have quite a few risks that need to be addressed before purchasing.
There are a few advantages that come from investing in corporate debentures, which will be examined first in this article. These advantages are highly dependable on the success rate of the current interest rate and economic situation of society.
Corporate bonds and debentures are usually much more rewarding then government bonds or bank investments and provide a higher rate of financial return for their investors. If a company is selling bonds to people, it means that they definitely need the money and are willing to pay you quite a bit of additional money to use it. The fact of receiving a greater return on corporate bonds is a great advantage to these types of investment.
Another great advantage to debentures is that at the end of the lending period companies usually offer the assets in the form of stock, which can ultimately be very valuable. Stocks are another great form of investment and are sometimes better than receiving immediate cash in return.Although the advantages of debentures can be clearly seen, there are a number risks and disadvantages to investing in corporate bonds.
Success Or Failure
You are taking a great risk when investing in a corporate bond because the success of the company will determine how valuable your bond is. A company bond is only valuable when the company is successful and profitable, but if it fails, then you will lose a great amount of money. Debentures and bonds hold greater risks because the company could eventually go out of business, so this type of investment should be done very carefully.
Debentures can be a very attractive form of investment, but only should be taken advantage of with companies that have a very high probability of being successful. Large and already successful businesses are smart forms of investments when considering buying corporate debentures.
The Disadvantages of Convertible Debentures
By Gilberto Fuentes, eHow Contributor
Convertible debentures carry risks worth considering before investing.
A convertible debenture is a bond that may be exchanged for stock at a particular point in time by the investor or the issuing company. The option to convert to stock is an enticement for investors to take positions in this security. Because of the conversion option, convertible debentures may pay a lower interest rate than traditional bonds because of the potential gains from converting to stock. The proceeds from a convertible debenture are used by the issuing company for a particular project or expand operations. However, despite their potential for returns, convertible debentures carry disadvantages worth considering.
- Credit Risk
- Convertible debentures may
remain vulnerable to the issuing company's credit rating. Generally,
companies with strong credit ratings are more likely to repay convertible
debenture investors. However, if a strong credit rating is downgraded by
rating agencies, the risk of default may increase making the convertible
debenture a more risky investment. Similarly, investing in convertible
debentures from companies with less favorable credit ratings increases
the risk of default.
- In addition, if the company issuing convertible debentures falls into bankruptcy, you may not necessarily recover your investment. If you hold a convertible debenture, you are considered a creditor of the company. Creditors are commonly paid before shareholders out of the remaining assets of the bankrupt company. However, this may not always be the case.
- Convertible debentures are unsecured bonds, backed only by the issuing company's credit rating and long-term profitability. If the company runs into financial trouble, investors in convertible debentures may only be able to claim company assets that are not already used to back other bond issues or collateral for additional credit lines. In addition, like most securities, bonds are not insured against loss by the federal government or any other agency.