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Indian Economy - Bonds vs Debentures

Raghavendra K Ravi
30/05/2017 0 0

Debt Instruments:

  • Credit rating → Gilt securities vs Junk bonds.
  • Bond vs Debenture.
  • Optionally fully convertible debentures (OFCD).
  • Other types of Debentures.
  • Inflation indexed bonds (IIB).

 Credit rating for Sovereign Bonds (Rating of Countries):

  • Credit rating companies like CRISIL, S&P, Moody’s etc. also give credit ratings (AA, A, BBB, C, D etc.) to countries based on their eco-political conditions.
  • India hold a credit rating in medium risk category just above the junk status.
Factors affecting credit rating:
  • Fiscal deficit.
  • Inflation.
  • Infrastructure.
  • Foreign investment.
  • GDP growth.

Bond vs Debenture:

  • Bond is the terminology used in England while debenture is the terminology used in America.
  • The term bond is used for a Government or PSU security while the term debenture is used for private companies securities.
  • In India, Bondholders are secured by access to the underlying asset in case of default by the issuer.
  • Debentures, on the other hand, are unsecured, with debenture holders not having recourse to assets in the case of default by the debenture issuer.

 Optionally fully-convertible debentures (OFCD):

  • Investors have option to change Debentures to Shares.
  • If debentures are changed to shares then from companies point of view.
  • No further interest payment headache.
  • No profit to the company → No share.
  • Will only share dividend when company makes profit.
  • If debentures are changed to shares then from investors point of view.
  • If company makes higher profit.
  • He will get bigger dividend.

Other Types of Debentures:

  • Non-Convertible debentures.
  • Partially convertible debentures→ 100 Debenture – Rs. 70 (Non-convertible) + Rs. 30 ( Can be converted to Equity).
  • Fully convertible debentures → 100 Debenture → Fully converted to equity (No Choice).
  • Optionally convertible debentures → Choice after two years → For ex. 1 Debenture = 3 shares.
  • Redeemable vs irredeemable before Maturity period.
  • Fixed interest rate vs lndex - linked interest rate (Sensex etc.).

 

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