Long- Term Sources of Finance

Debentures and Bonds

Long Term Promissory note to raise capital from the

public
The company stipulates the rate of interest and
maturity
Mostly Public companies issue bond
Debenture and bonds are used interchangeably
Debenture carries fixed rate of interest while bonds
may have floating rate of interest
 Features of Debentures

Interest Rate
Credit Rating
Maturity
Redemption
Sinking Fund
Security
Buy-back provision
Claim on assets and income
Indenture
Yield
Advantages of Debentures from Company’s view point

Tax deductibility of interest

Less Costly
No Direct Control
Reduced real obligation
Fixed payment of interest
Advantages of debentures from Investor’s view point:-
Less Risky
Secured
Legal recourse available
Fixed return
 Disadvantages of Debentures from Company’s view point

Obligatory payment
Increased risk
Restrictive covenants

Disadvantages of Debentures from Debenture holder’s

view point
Low return
 Types of Debenture

Convertible
 Non convertibles Debentures (NCD)
 Fully Convertible Debentures (FCD)
 Partly convertible Debentures (PCD)
Redeemable
 Redeemable Debentures
 Irredeemable debentures
Participating debentures
Deep Discount Bond
 Term Loan

Term loan are obtained directly from the banks and

financial institutions.
Long term loans usually have more than 5 years
maturity
Used for large expansions, modernization or
diversification projects
 Features of Term Loan

Maturity
Direct Negotiation
Security :-
 Fixed Charge
 Floating Charge
Restrictive Covenants
Convertibility (loan into equity-Air India-2015)
Repayment Schedule
 Advantages of Term loan

Less costly
Less time consuming
Tax deductibility of interest
 Disadvantages of Term loan

Restrictive Covenants