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Bonds and Debentures
Debt instruments can be further classified
into the following categories based on the different characteristics with
which they are floated in the market:
Debentures
Bonds
Debentures
Main characteristics
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They are fixed interest debt instruments
with varying period of maturity.
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Can either be placed privately or offered
for subscription.
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May or may not be listed on the stock
exchange.
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If listed on the stock exchanges, they
should be rated prior to the listing by any of the credit rating agencies
designated by SEBI.
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When offered for subscription a debenture
redemption reserve has to be maintained.
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The period of maturity normally varies
from 3 to 10 years and may also be more for projects with a high gestation
period.
Bonds may be of many types -
they may be regular income, infrastructure, tax saving or deep discount
bonds. These are financial instruments with a fixed coupon rate and
a definite period after which these are redeemed. The fundamental difference
between debentures and bonds is that the former is normally secured whereas
the latter is not. Hence in general bonds are issued at a higher interest
rate than debentures. This avenue of financing is mainly availed by highly
reputed corporate concerns and financial institutions.
The three main kinds of instruments
in this category are as follows:
Fixed rate
Floating rate
Discount bonds
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The bonds may also be regular income
with the coupons being paid at fixed intervals or cumulative in which the
interest is paid on redemption.
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Unlike debentures, bonds can be floated
with a fixed interest or floating interest rate. They can also be floated
without interest and are called discount bonds as they are issued at a
discount to the face value and an investor is paid the face value on redemption.and
if offered for longer terms are known as deep discount bonds.
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The main advantage with interest bearing
bonds is the floating interest rate, which is stipulated based on certain
mark-up over stock market index or some such index.
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From the point of view of the investor
bonds are instruments carrying higher risk and higher returns as compared
to debentures.
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This has to be kept in mind while floating
bond issues for financing purposes. With the current buoyancy in capital
markets for equity instruments the demand for corporate bonds is low.
Different types
of debentures
SEBI guidelines
for debentures issued for public subscription
Credit Rating
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