Finance

Demystifying Debentures: AComprehensive Journey into FinancialFreedom

Debentures are a form of fixed-income security that provides investors with a return in the form of periodic interest payments. In simpler terms, it is a loan taken by the issuer from the investor with the promise of repayment with interest after a certain period. Debentures are an attractive investment option for fixed-income seekers as they offer stable returns and low risk. In this article, we will take a detailed look into debentures – their meaning, types, and how they can help investors achieve financial freedom.

Meaning and Types of Debentures

The Debentures are long-term financial instruments issued by companies or government entities to raise funds. They are a type of bond that can be traded on stock exchanges. The issuer promises to pay interest at a pre-specified rate and repay the principal amount at maturity. Debentures are considered a low-risk investment option as the issuer generally has a good credit rating and investors stand ahead of equity holders in the event of liquidation.

There are two main types of debentures – convertible and non-convertible. Convertible debentures can be converted into equity shares after a certain period, whereas non-convertible debentures cannot be converted into equity shares. Non-convertible debentures are further classified into secured and unsecured debentures. Secured debentures are backed by assets, while unsecured debentures are not.

Calculating returns on debentures

Let’s take an example to see how returns are calculated on debentures. Say you invest INR 1,000 in a company’s debenture that pays an interest rate of 8% per annum for 5 years. The interest rate is payable annually.

Year 1 – You will receive an interest payment of INR 80 (INR 1,000 * 8%) at the end of the year. Your investment value at the end of the year will be INR 1,080.

Year 2 – You will receive an interest payment of INR 80 (INR 1,080 * 8%) at the end of the year. Your investment value at the end of the year will be INR 1,160.

Year 3 – You will receive an interest payment of INR 80 (INR 1,160 * 8%) at the end of the year. Your investment value at the end of the year will be INR 1,240.

Year 4 – You will receive an interest payment of INR 80 (INR 1,240 * 8%) at the end of the year. Your investment value at the end of the year will be INR 1,320.

Year 5 – You will receive an interest payment of INR 80 (INR 1,320 * 8%) at the end of the year. Your investment value at the end of the year will be INR 1,400, which includes the principal amount of INR 1,000.

Overall you will receive a total of INR 400 (INR 80 * 5) as interest, and your investment value will be INR 1,400 at the end of 5 years.

Conclusion

Debentures are an attractive investment option for fixed-income seekers as they offer stable returns and low risk. However, like any investment, there are risks associated with debentures, such as default risk and interest rate risk. You should go through in fear and greed indicator to check the market sentiment. Therefore, investors must carefully evaluate all the pros and cons and do their due diligence before investing in debentures. Additionally, investors must gauge all the pros and cons of trading in the Indian stock market and invest prudently.

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