Issue and Redemption of Debentures
Class 12 · Accountancy
4 ideas in Class 12 Accountancy, explained in plain words, with games and quizzes to practise.
Debentures and Their Kinds
Part of: Borrowing through debentures
A debenture is a loan paper: the company borrows and pays fixed interest, called coupon, whether it earns profits or not. Holders are lenders, not owners, so they get no votes. Kinds include secured or unsecured, redeemable or perpetual, convertible or plain, and registered or bearer. For example, 2000 debentures of 100 rupees at 9 percent cost 18000 in yearly interest.
Why it matters. Debt and equity behave oppositely in bad years, and each kind of paper carries its own safety and repayment rule. Mixing them misreads risk and misstates cost.
Formulas
- Yearly interest = Debentures x Face value x Rate / 100
- Half-yearly interest = Yearly interest / 2
- Fixed interest is paid even with no profit
Key words
- Debenture
- : Loan paper carrying fixed interest.
- Coupon rate
- : Fixed yearly interest percent.
- Secured debentures
- : Loans backed by company assets.
- Convertible debentures
- : Loans that can turn into shares.
Try it in two minutes
- Split 10 slips into owners and lenders. Ask: who votes and who earns fixed coins?
- Sort lender slips into secured, convertible and perpetual piles. Ask: what differs?
- Price 2000 slips of 100 at 9 percent. Ask: what is the yearly bill?
Try at home. A company issues 1000 debentures of 100 rupees at 8 percent. Find the yearly interest.
Issue of Debentures and Writing off Discount
Part of: Borrowing through debentures
Debentures may sell at face value, above it at a premium, or below it at a discount. Premium joins securities premium at once, while discount is a loss spread evenly over the loan's life. If repayment itself carries a premium, that extra is also part of the loss on issue. For example, a discount of 150000 over 5 years writes off 30000 each year.
Why it matters. Spreading the loss matches each year's cost with that year's borrowing. Dumping it all at once would wreck one year's profit and flatter the rest.
Formulas
- Premium collected = Debentures x (Issue price - Face value)
- Discount written off = Total discount / Life in years
- Loss on issue = Discount + Premium on redemption
Key words
- At a discount
- : Issue price below face value.
- Loss on issue
- : Cost of cheap issue plus dear repayment.
- Written off
- : Loss charged bit by bit yearly.
- Premium on redemption
- : Extra paid back over face value.
Try it in two minutes
- Sell 10 loan slips of 100 at 105. Ask: where does the extra 50 sit?
- Sell 10 more at 95. Ask: who bears the missing 50?
- Spread the 150000 discount over 5 yearly piles. Ask: what falls yearly?
Try at home. A discount of 80000 is written off over 4 years. Find the yearly write-off.
Redemption Reserve and Investment
Part of: Repaying the loan
Before repaying, companies that must do so lock 10 percent of outstanding debentures as Debenture Redemption Reserve out of profits, and park 15 percent of the maturing amount in safe securities by 30 April as Debenture Redemption Investment. After full repayment the reserve moves to general reserve. For example, 300000 outstanding needs 30000 of reserve, and 200000 maturing needs 30000 of investment.
Why it matters. Lenders must find cash waiting at maturity, not promises. The two locks force the company to save first and spend later.
Formulas
- DRR = 10 / 100 x Outstanding debentures
- DRI = 15 / 100 x Maturing debentures
- Extra DRI = Required DRI - DRI held
Key words
- DRR
- : Profit locked for debenture repayment.
- DRI
- : Safe papers parked for maturity.
- Out of profits
- : Repayment funded by locked earnings.
- General reserve
- : Free reserve after full repayment.
Try it in two minutes
- Stack 30 beads as outstanding loan and lock 3 as reserve. Ask: whose profits fund it?
- Park 15 of every 100 maturing in safe papers by April. Ask: why before the year runs?
- After repayment, shift the reserve beads to general use. Ask: why only now?
Try at home. Outstanding debentures are 500000. Find the reserve at 10 percent.
Ways of Redemption
Part of: Repaying the loan
Debentures are repaid in one of three ways: in a lump sum on the due date, by buying them in the open market, or by converting them into shares. Market buys quote ex-interest, where the buyer pays a clean price, or cum-interest, where the quoted price already holds accrued interest. Conversion swaps loan value for shares at the agreed price. For example, 500 debentures of 100 rupees convert into 2500 shares issued at 20 rupees.
Why it matters. Each route changes cash, interest and ownership differently. Splitting price from interest wrongly overstates cost, and a bad conversion ratio cheats either lenders or owners.
Formulas
- Shares on conversion = Loan value / Share issue price
- Clean price = Cum price - Accrued interest
- Accrued interest = Value x Rate x Months / 12 / 100
Key words
- Lump sum
- : Full repayment on one date.
- Ex-interest
- : Price without accrued interest.
- Cum-interest
- : Price holding accrued interest.
- Conversion
- : Swapping loans for shares.
Try it in two minutes
- Stack 5 loan slips due on one date for lump-sum repayment.
- Buy 2 slips from the market at a quoted cum price and split interest from cost.
- Swap 5 slips of 100 for shares at 20 each. Ask: how many shares appear?
Try at home. 160 debentures of 100 rupees convert into shares issued at 16 rupees each. How many shares result?
What your child will practise
- Debentures and Their Kinds: Space Quick Fire (Quick Fire)
- Issue of Debentures and Writing off Discount: Ocean Puzzle (Clue Puzzle)
- Issue of Debentures and Writing off Discount: Ocean Quick Fire (Quick Fire)
- Redemption Reserve and Investment: Jungle Quick Fire (Quick Fire)
- Ways of Redemption: Candy Puzzle (Clue Puzzle)
- Quiz: Debentures and Their Kinds (8 questions)
- Quiz: Issue of Debentures and Writing off Discount (8 questions)
- Quiz: Redemption Reserve and Investment (8 questions)
- Quiz: Ways of Redemption (8 questions)