Government-issued Debenture Example
A Treasury bond or T-bond issued by the government would be a debenture example. These bonds help the government finance its projects and fund the day-to-day working operations. The Treasury Department of a Country issues these bonds throughout the year by 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 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 the Government issues 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 a rise in interest rates.
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 what we call the 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 is 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 shows Company issued a debenture example.
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.
Read more about Characteristics of Debentures.
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 at a 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 than the other investments that are paying high returns in current market situations. Therefore, the investor will earn a lower yield than 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. Suppose 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.