What Are The Advantages And Disadvantages Of Debentures?
Some people have probably never even heard of the term debenture before, but it will be defined in this article. We have to first understand how companies offer and sell bonds to the public. This process is somewhat easier to understand and simply takes a little bit of education to comprehend.
Whenever a company needs more money to help it function and grow, it will sometimes try to sell company bonds to people. A company bond is simply an amount of money that the company borrows from you to use on various business related expenditures. In return for using your money, the company promises to pay back the full amount of money they initially borrowed plus interest over an extended period of time.
Companies also provide things that offer you financial protection in cases they are unable to pay back the amount of borrowed money and interest in the form of immediate cash. Some of this protection comes in the form of assets such as company stock or debentures, which are basically promises that the company will eventually pay you back. Company bonds can be a great thing to invest in, but they also have quite a few risks that need to be addressed before purchasing.
There are a few advantages that come from investing in corporate debentures, which will be examined first in this article. These advantages are highly dependable on the success rate of the current interest rate and economic situation of society.
Corporate bonds and debentures are usually much more rewarding then government bonds or bank investments and provide a higher rate of financial return for their investors. If a company is selling bonds to people, it means that they definitely need the money and are willing to pay you quite a bit of additional money to use it. The fact of receiving a greater return on corporate bonds is a great advantage to these types of investment.
Another great advantage to debentures is that at the end of the lending period companies usually offer the assets in the form of stock, which can ultimately be very valuable. Stocks are another great form of investment and are sometimes better than receiving immediate cash in return.Although the advantages of debentures can be clearly seen, there are a number risks and disadvantages to investing in corporate bonds.
Success Or Failure
You are taking a great risk when investing in a corporate bond because the success of the company will determine how valuable your bond is. A company bond is only valuable when the company is successful and profitable, but if it fails, then you will lose a great amount of money. Debentures and bonds hold greater risks because the company could eventually go out of business, so this type of investment should be done very carefully.
Debentures can be a very attractive form of investment, but only should be taken advantage of with companies that have a very high probability of being successful. Large and already successful businesses are smart forms of investments when considering buying corporate debentures.