A debenture is a debt paper issued by a company with the aim of raising money from the public. It has a specified tenure and offers a fixed interest rate called coupon.
If on maturity the debentures are converted into shares of the company, it is a Convertible debenture and if the principle along with the accumulated interest is paid back to the investor it is a Non-Convertible Debenture. NCDs are of two types Secured and Unsecured.
A secured NCD is backed by the assets of the company and in case the company fails to service its obligation (i.e.: defaults on the payment of interest or principle), the investor holding the debenture has a proportional claim to its assets, which are then liquidated. Unsecured NCDs are not backed by the assets of the company, hence are more risky. To compensate for the higher risk they offer a higher rate of interest compared to the secured NCDs.
If on maturity the debentures are converted into shares of the company, it is a Convertible debenture and if the principle along with the accumulated interest is paid back to the investor it is a Non-Convertible Debenture. NCDs are of two types Secured and Unsecured.
A secured NCD is backed by the assets of the company and in case the company fails to service its obligation (i.e.: defaults on the payment of interest or principle), the investor holding the debenture has a proportional claim to its assets, which are then liquidated. Unsecured NCDs are not backed by the assets of the company, hence are more risky. To compensate for the higher risk they offer a higher rate of interest compared to the secured NCDs.
FINANCIAL ASPECTS OF THE COMPANY THAT YOU SHOULD LOOK AT BEFORE INVESTING IN NON-CONVERTIBLE DEBENTURES
Before investing in a NCD, it would be wise to read its financial performance mentioned in the prospectus. You must check out financial ratios like Interest Coverage Ratio, Capital Adequacy Ratio and Non-Performing assets of the company.
Interest Coverage Ratio is determined by dividing a company’s earnings before interest and taxes (EBIT) by the company’s interest expenses in a period that shows how easily a company can pay interest on outstanding debt. Interest Coverage Ratio of 2 and above should be a positive sign, the higher the better.
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