Zero Coupon and Specific Rate Debentures Secured

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Zero Coupon and Specific Rate Debentures Secured

Delhi College Of Arts and Commerce University of Delhi Subject- INVESTING IN STOCK MARKET ( E- Resources) Course- BCom (prog) Sem IV-C DATE – 2nd April 2020 Unit 1- Investing fundamentals Topic done already- Meaning of investing Nature of investing Difference between Investment and Speculation Process of investment Risk and return in context of financial investment Concept of risk return trade off in investment Concepts of IPO and FPO and difference between them Equity and bonds Types of debentures (Part A) Topic to be done today- Types of debentures (Part B) No Coupon Rate ZERO COUPON AND SPECIFIC RATE DEBENTURES Zero coupon debentures do not carry any coupon rate or we can say that there is a zero coupon rate. The debenture holder will not get any interest on these types of debentures. Need not get surprised, for compensating against no interest, companies issue them at a discounted price which is less compared to the face value of it. The implicit interest or benefit is the difference between the issue price and the face value of that debenture. These debentures are to be redeemed at face value. These are also known as ‘Deep Discount Bonds’. All other debentures with a specified rate of interest are specific rate debentures which are just like a normal debenture. SECURED PREMIUM NOTES / DEBENTURES These are secured debentures which are redeemed at a premium over the face value of the debentures. They are similar to zero coupon bonds. The only difference is that the discount and premium. Zero coupon bonds are issued at the discount and redeemed at par whereas the secured premium notes are issued at par and redeemed at the premium. Mode of Redemption CALLABLE AND PUTTABLE DEBENTURES / BONDS Whenever a corporation is borrowing for the long term, by issuing fixed rate debentures, it has a risk of decrease in the rate of interest in the market. Suppose, a company is issuing 20 years debentures offering a rate of interest 7 %, after 5 years similar debentures can be issued in market offering rate of interest 4 %, then for a corporation, there will be comparatively higher cost with existing debenture. So, the corporation may issue long term debenture with a callable feature in which it will have a right to redeem the debenture in between. However in this case usually the company will offer a premium to an investor in case of early redemption. In the case of puttable debentures, the option lies with the investors for early redemption. Generally, a company who is in bad need of money will issue Puttable debenture. In this case, debenture holders can ask the company to redeem their debenture and ask for principal repayment. This type of security can be issued by the company to avoid hostile take over. NOTE: In case of difficulty in understanding of any topic, students can freely contact the undersigned. Subject taught by: Ms. Karishma Khurana (Assistant Professor, DCAC ) # 9711101731 .

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