Debenture interest example for dating, financial definition of debenture
Low Issue Cost In the case of a term loan, there is almost no cost of the issue involved which is a huge cost in case of equity financing. In other words, the investors gain interest as income from the debentures.
The interest received on investments is also invested. The debenture holder would receive an annual dividend of 5, dollars for 10 years, and upon maturity of the debenture, the debenture holder will receive the 50, dollars back.
Difference between Share and Debenture
The annual installment for Debenture Redemption Fund was Rs 50, Ex-interest Price and Cum-interest Price: It is done when the company wants to keep open its option of reselling the debentures. Cheaper Source of Finance As discussed above, the interest cost incurred on debt financings such as debentures or term loans enjoys a tax shield which indirectly lowers the cost.
Then, the scheme may be used to collect funds to repay any liability. The underlying assumption behind the calculation is that the entity is making the profit at least to the tune of total interest payment.
No Dilution in Share of Profits Opting for debentures over the equity as a source of finance keeps intact the profit-sharing percentage of existing shareholders. A typical example for this would be when a promoter of a company invests money in the form of debt, rather than in the form of stock.
Such debt is referred to as subordinate, because the debt providers the lenders have subordinate status in relationship to the normal debt. Debentures are secured by a charge on assets, although unsecured debentures can also be issued.