Syndicate
Debentures
As in public funds, debentures are commerce bonds that represent the debts of issuing companies. In fact, debentures are part of a loan requested by the issuing company. That is why debentures are also called government loans.
In a debenture government loan there is a plurality of money lenders that are investors that have purchased debentures. Debentures are fixed-income commerce bonds. Investing in debentures is safer than investing in stocks, since to not receive interests from debentures a payment suspension should occur in the issuing company . Besides, in case of liquidation of the issuing company, the debenturers recover their investments before stock holders.
As a counterpart, when an issuing company and the stock market go through a good period, performance expectations of debentures is less than those from stocks. For this reason it is normal that investments in debentures be increased when the stock market is going through a bad period, since investors disinvest in stocks to invest in fixed-income commerce bonds. On the contrary, when the stock market is up, investors withdraw their investment in debentures to invest them in stocks, since they can get important capital gains due to the raise in price stocks register.
In this group we generally, only include the issued debt by private companies, since the one issued by public institutions is in the public effects group.
Basically, this debt is issued as debentures, bonds and mortgage certificates.
Debentures can be of various types according to the guarantee provided by the issuing company to the investor.
Simple: have no mortgage guarantee, since the only one comes from the own issuing company.
Mortgage: holds a mortgage guarantee. Therefore, in case the company goes bankrupt investors have a guarantee over mortgaged goods.
There are other debenture classifications; interest wise, debentures can be:
Constant: a fixed interest during the time the government loan lasts.
Variable: the interest received by investors can vary according to inflation variables, for example. When the type of interest or the reimbursement of principal of debentures are related to a specific index which are called Indexed debentures.
Interest can be paid:.
- periodically (monthly, every 3 months, every six months or annually)
- at debentures maturity (zero-coupon debentures)
- at the beginning of debentures disbursement (interests at discount).
A special type of bonds are the so called “junk bonds.” These are bonds that whose main characteristic is the high interest rate they provide, combined with the high risk due to the issuing company?s characteristics. This high risk is normally due to indebted companies, but with great growth perspectives.
Another type of debentures are the subordinate debentures. These are issued by credit entities which must reinforce their own resources as a consequence of the central bank?s requirements. Despite being a debt, they have a very long-term and interests can be subject to certain restrictions, such as the need to get benefits. Besides, in case of insolvency from the issuing entity, the holders of the subordinates debt are the last creditors to collect after the rest of the creditors and before stockholders. These features make the subordinate debt be in the middle of the debt and resources.