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Government-issued Debenture Example
Treasury bond or T-bond issued by the government would be a debenture example. These bonds help the government to finance its projects and to fund the day to day working operations. The Treasury Department of a Country issues these bonds throughout the year by the way of auctions.
The few Treasury bonds are traded in the secondary market. The financial institutions and the broker play a role in buying and selling of the debentures in the secondary market. The investor buys and sells the formerly issued debenture through these brokers and financial institutions. The T-Bills that are issued by the Government are nearly risk-free as they are backed by the faith and credit of the Government of the Country. But, these debentures face the risks of inflation and rise in interest rate.
The picture below shows the Treasury bill the Government has issued
The above picture shows the principal amount i.e. One Hundred Thousand Dollars. The date of issue is October 9, 1969, and the due date or we call maturity date when the principal amount will be paid to the holder is April 9, 1970. This makes the maturity period of this bill is of 6 months. There is no interest to be paid on these bills at the time of maturity. These bills are only valid when the date of issue and maturity are specified.
Company Issued Debenture Example
The companies also use debentures as the source of raising funds. The debenture is a certificate that acknowledges the debt that the company takes from the public. The funds that the company raises through debentures have a fixed rate of interest. The company has to repay the debt at the end of the specific time period. The debenture that the company issue can be the Non-Convertible Debentures (NCD) and Convertible Debentures.
The picture below Show Company issued a debenture example.
The picture shows the certificate of debenture issued by the Modern Investment (Proprietary) Ltd. This debenture example shows us how a debenture certificate that the company issues to its debenture holders. This certificate shows the Number of debentures (175), the rate per debenture ($100), and rate of interest (5.5% per annum).
Along with it gives information about all the necessary information regarding issued debentures. The certificate has the seal of the company. The date of issue is also specified. The rate and period when the debentures holders will receive the interest are also specified (i.e. half-yearly).
There are various other debenture examples like NCDs (non-convertible debentures). The name of the debenture depends upon the company which has issued it. But the features of all the debentures are somewhat the same.
Debenture Risks to Investors
Both the companies and the government issue the debentures as and when they require. But the investor or the debenture holder has to face the risk.
The risk can be of inflation. Here, the inflation risk is when the interest rate that is paid to the investor does not keep with the rise in the rate of inflation. Say, the inflation rises by 4% and the interest rate on a debenture is 3%. The investor is very well going to be in loss.
Interest Rate Risk
There is another risk of the interest rate. Here, the investor holds the debts during the time of rising interest rates in the market. The investor finds himself getting less return on his investment as compared to the other investments that are paying high return in current market situations. Therefore, the investor will earn a lower yield in comparison to other investors (playing in current market situations).
Credit and Default Risk
Further, the debentures also carry credit and default risk. As we know that the debentures are as secure as the financial strength of the issuer. If a company is struggling financially, whether due to internal reasons or because of macroeconomic factors, the investors are at the risk of default. The only consolation, in this case, is that the debenture holders have a right to be paid before the common stoke holders in case of bankruptcy.Last updated on : May 15th, 2019