Debentures either create a debt or acknowledge a doubt. These debentures are freely transferable too. Debenture holders do not have the right to vote in company as they are actually creditors. Debentures are long term debts.
Let us look at the characteristics of debentures as a whole,
- Debentures should be repaid within a specific time
- They are not ever lasting fund sources
- Debentures are tenable
- Firm has the freedom to determine the interest rate
- Less risky for investors
- No voting right for those who hold debentures
What is Redeemable Debenture
Redeemable Debenture is an agreement where in which a company or firm issuing a debenture will agree to repay the sum which is borrowed on a specific date after a specified period of notice. Redeemable Debentures are those debentures or securities which have to be repaid within a specific period or at the time of maturity. Debenture has been derived from a Latin word “debere” meaning borrow. Debenture is a written document with acknowledgement of debt. Companies issues different types of debentures. Redeemable debentures are debts.
Redeemable debentures are those debentures which are made payable on the finishing of the definite period either in whole amount or in part payments during the life time of the company. Debentures can be redeemed either at par or at premium. Redeemable Debenture is those which are repaid on a specific date. Redeemable Debenture is a current liability.
For example if a Company has issued 9 percentages to 7 years for $ 1000 Debentures, this issue of debentures has coupon rate of 9 percentages per year and redeemable period of almost 7 years. The quantity raised by issuing these debentures is to be repaid within 7 times from now. The issuer has a substantial benefit from issuing a Debenture because the particular assets are kept without any encumbrances so that the decision is open for issuing them in prospect for financing needs.
Advantages of Redeemable Debenture
- Dilution of control is less
- Lesser cost
- Interest can be treated as an expense
- Attractive for investors
- Flexibility of terms
- Lesser rate of interest
Disadvantages of Redeemable Debenture
- There is a charge on the assets
- No voting rights
- Fixed obligation
- Lesser credibility
In the case of redeemable debentures, the Company will have to repay the amount as per the agreed terms. As per the date that has been agreed upon, the debentures has to be repaid or if the debenture holder ask for the repayment company has to consider his request and thus redeemable debentures are not advantageous for companies like irredeemable debentures.