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Fixed interest bearing securities includes a number of investments like gilt-edged stock, semi-gilt-edged stock and debentures. Gilt-edged stocks are IOUs from the government offering a full guarantee that all capital plus interest will be paid to the investor. If you buy gilt-edged stock, you know in advance how much interest you’re going to receive. Semi-gilt-edged stocks are similar to gilt-edged stocks but they come with higher risks and returns. Debentures are IOUs that have been issued by companies.

What are debentures?

A debenture is basically a written ‘I owe you’ and is proof of money lent to a particular person or institution by a particular person or institution. Companies issue these IOUs to obtain funds (which are essentially funds that are over and above the issuing of shares). These IOUs are fixed interest bearing securities and represent long-term loans or investments.

This means that if you buy debentures, you are a creditor and you are entitled to the borrowed capital plus interest. The period and manner of settlement will be set out in the IOU. As a debenture holder, you have a higher preference demand than ordinary preference shareholders when it comes to the possibility of a company being liquidated.

As a debenture holder, you have no voting rights. The exception is if your interest payments are in arrears. On the other hand, you can enjoy higher interest than gilt-edged or semi-gilt-edged stocks.

Types of debentures

Guaranteed debentures are debentures issued by a subsidiary company but guaranteed by a holding company. Secured debentures are issued with assets as security in case the company is ever liquidated. Unsecured debentures means that no security is offered if the company is liquidated and you, as a debenture holder, have no preference above other creditors in such a case.

Participating debentures mean that annual interest payments and surplus profits are received by the debenture holders. Convertible debentures permit debenture holders to convert their shares to ordinary shares. Redeemable debentures allow for a company to redeem the loan before the debenture’s maturity date.

Tags: Finances