Earning money from bonds and debentures can be very lucrative. But before you decide to invest in such a plan, you should find out exactly what debentures are and how the entire deal works. You also need to know whether the benefits are higher than the risks and if your money is going to be safe or not.
Unsecured notes, debentures, fixed term deposits, and bonds fall under the category of investments that give you a fixed return or fixed interest payments during the duration of your investment. If you invest over a longer period, you should get a higher return. What you have to remember is that there are no capital gains here, only interest payments. But the good thing is that these payments are consistent and predictable unlike stocks which are so volatile.
Debentures are a common kind of fixed interest investment in corporate finance. This is a way for companies to borrow some money from people who are interested and in turn, they return a good amount of interest.
A debenture is essentially a loan with a known interest rate at the very beginning. Debentures help companies in financing their investments and long term projects. Private investors can gain regular income by investing in debentures in well-established companies.
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.
There are two different kinds of debentures, namely, Convertible Debentures and Non-Convertible Debentures. Although convertible debentures usually have lower interest rates, they can be converted to equity shares after a while. Non-convertible debentures, on the other hand, have higher interest rates but they cannot be exchanged for equity shares of the company involved.