A debenture is a long-term promissory note used to raise debt funds. The firm promises to pay periodic interest and principal at maturity. Ideally, a debenture is a long-term bond that is not secured by a pledge of a specific property. However, like other general creditors claims, its secured by a pledge of a specific property not otherwise pledged.
Bonds are long term promissory notes issued by a company to raise debt funds and usually secured specifically on company’s assets.
Represents a pledge of a designated property for a loan. Under a mortgage bond, a company pledges certain real assets as security for the bond. A mortgage bond therefore is secured by real property (i.e. land and buildings).
4.4 Subordinated Debentures
The term subordinated means below or inferior and therefore subordinated debts have claims in assets after unsubordinated debts in the event of liquidation. Debentures can be subordinated to designated notes payable (usually bank loans) and to any other specific debt. In the case of liquidation the subordinated debentures cannot be paid until senior debts as named in the indenture has been paid. The long-term relationship between the borrower and lender of long-term promissory notes is contained in a document called indenture. This document discusses a number of factors important to the contracting parties such as:
The form of bond and instrument
A complete description of the property pledged
The authorized account of the bond issue
Detailed protective clauses or covenants
Minimum current ratio requirements.
The provision for redemption or core privileges.
4.5 Income Bonds
Income bonds provide that interest must be paid only if earnings of the firm are sufficient to meet the interest obligation. The principal must however be paid when due. Main advantage of income bond in the company is that interest is not affixed, charged and is not payable if the company does not make profit. Some income bonds however are cumulative.
4.6 Floating Rate Notes (Bonds)
When inflation forces interest rates to high levels, borrowers are reluctant to commit themselves to a long-term debt. Yield curves are typically inverted at such times with short-term interest rates being higher than long term ones. The main reason for this is that a borrower would rather pay prevention for short-term funds than lock themselves into a long-term rate. The floating rate bond addresses this problem. In a floating rate bond the interest rate varies at a given percentage above prevailing short term or long-term treasury bond yields.