SRI SHARADA INSTITUTE OF INDIAN MANAGEMENT

-RESEARCH

Plot No. 7, Phase-II, Behind The Grand Hotel,

Vasant Kunj, New Delhi - 110070
Tel:  +91-11-26124090 / 91 / 92
Fax:  26124092/26122115

FINANCE PROJECT REPORT

ON

“DEBENTURES AND BONDS ”

A Report Submitted In Partial Fulfillment Of The Requirement Of The Two Year
Full Time Post Graduate Diploma In Business Management.

SUBMITTED TO: SUBMITED BY:

PROF. SANDEEP S. PARMAR GAURAV KUMAR

(SEC- ‘A’, R.NO. 20090119)

VINOD T. PANCHAL

(SEC- ‘B’, R. NO. 20090221)

PGDM (2009-2011 Batch)

 Table of Contents

1.Acknowledgement

2.Preface

3. Abstract

4. Debenture - Meaning

5. Types of Debenture according to Convertibility

6. Types of Debentures

7. Advantages and Disadvantages of Debentures

8. Debenture Redemption Reserve - Meaning

9. Bond – Meaning & Features

10. Types of Bonds

11. Trading & Valuation of Bond

12. Investing in Bond & Bond Indices

13. Conclusion & Recommendations

 Acknowledgement

We would like to thank our faculty Dr. Sandeep S. Parmar and our Project Guide
Dr. Sandeep S. Parmar who has been the greatest support in completing this
project. Without their constant feedback, this project would not have been a reality.

This project would not have seen the light of the day without the support of our
faculty mentor Dr. Sandeep S. Parmar . He has been of great help in guiding us
through the various stages of our project.

Constructive criticism and feedback would be highly appreciated.

Gaurav Kumar
Sec – ‘A’ Roll NO. 20090119
Vinod T. Panchal
Sec - ‘B’ Roll No. 20090221

Sri Sharada Institute of Indian Management –Research

Vasant Kunj , New Delhi

PREFACE
This Project Report Consist Of Detailed Study Of “ DEBENTURES AND BONDS ”With
Reference to Dr Sandeep S Parmar. A Sincere Effort Has Been Made To Know about the
debentures and bonds .

The debenture (corporate bond) is considered a great financial instrument in terms of funding for the non-
financial firms. A type of debt instrument that is not secured by physical asset or
collateral. Debentures are backed only by the general creditworthiness and reputation of the
issuer. Both corporations and governments frequently issue this type of bond in order to secure
capital. Like other types of bonds, debentures are documented in an indenture. 

Debentures have no collateral. Bond buyers generally purchase debentures based on the belief

that the bond issuer is unlikely to default on the repayment. An example of a
government debenture would be any government-issued Treasury bond (T-bond) or Treasury bill
(T-bill). T-bonds and T-bills are generally considered risk free because governments, at
worst, can print off more money or raise taxes to pay these type of debts. 

In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and,
depending on the terms of the bond, is obliged to pay interest (the coupon) and/or to repay the
principal at a later date, termed maturity. A bond is a formal contract to repay borrowed money
with interest at fixed intervals.

Thus a bond is like a loan: the issuer is the borrower (debtor), the holder is the lender (creditor),
and the coupon is the interest. Bonds provide the borrower with external funds to finance long-
term investments, or, in the case of government bonds, to finance current expenditure.
Certificates of deposit (CDs) or commercial paper are considered to be money market
instruments and not bonds. Bonds must be repaid at fixed intervals over a period of time.

In the case of Government Bonds, these are usually issued by auctions, where both members of
the public and banks may bid for bond. Since the coupon is fixed, but the price is not, the percent
return is a function both of the price paid as well as the coupon.

Abstract:     
The debenture (corporate bond) is considered a great financial instrument in terms of funding for
the non-financial firms in the Brazilian market. The intermediation would be done in the capital
market instead of through the commercial banks. The key issue for the development of this
market is the financial engineering involving the credit risk (chance that the corporate issuer can
default on its debt obligation). This paper proposes and tests a methodology to quantify this risk
in a cross-section of Brazilian debentures. Our approach is based on Merton’s (1974) asset
pricing model that uses the Black-Schole’s put option formula. The consequent optimization
techniques allow us to infer the risk of debentures. By using a simple and low-cost model, we
find a risk measure that is more conservative than the usual VaR (value at risk). Thus, we present
a methodology for obtaining the optimum portfolio composed of debentures subject to the
default risk.

   
In November 2000, a money manager needs to make a decision regarding an offering of
convertible bonds by Corning. The analysis requires her to compare the insights available from
standard descriptive ratios with those available from valuation analysis. This case is intended to
be a student's first exercise in analyzing convertible bonds and assumes some familiarity with
option-pricing theory and bond valuation. In addition, the case highlights the importance of
going beyond the convertible-bond calculations. The volatility of Corning stock has increased in
the past year, making the call option more valuable, but at the same time, Corning appears to be
issuing converts at a time when both its share price and stock-market valuations are at historic
highs. Thus, it is imperative that the student have a view on the sustainability of stock-market
valuations and the outlook for Corning. See also the B case (UVA-F-1367).

Debenture

In law, a debenture is a document that either creates a debt or acknowledges it. In

corporate finance, the term is used for a medium- to long-term debt instrument
used by large companies to borrow money. In some countries the term is used
interchangeably with bond, loan stock or note.

Debenture Mean
A type of debt instrument that is not secured by physical asset or
collateral. Debentures are backed only by the
general creditworthiness and reputation of the issuer. Both corporations and
governments frequently issue this type of bond in order to secure capital. Like
other types of bonds, debentures are documented in an indenture. 
Debentures have no collateral. Bond buyers generally purchase debentures based
on the belief that the bond issuer is unlikely to default on the repayment. An
example of a government debenture would be any government-issued Treasury
bond (T-bond) or Treasury bill (T-bill). T-bonds and T-bills are generally
considered risk free because governments, at worst, can print off more money or
raise taxes to pay these type of debts. 

Debentures are generally freely transferable by the debenture holder. Debenture

holders have no voting rights and the interest paid to them is a charge against profit
in the company's financial statements.

Security in different jurisdictions

In the United States, debenture refers specifically to an unsecured corporate bond,

i.e. a bond that does not have a certain line of income or piece of property or
equipment to guarantee repayment of principal upon the bond's maturity. Where
security is provided for loan stocks or bonds in the US, they are termed 'mortgage
bonds'.

However, in the United Kingdom a debenture is usually secured

In Asia, if repayment is secured by a charge over land, the loan document is called
a mortgage; where repayment is secured by a charge against other assets of the
company, the document is called a debenture; and where no security is involved,
the document is called a note or 'unsecured deposit note'.

Convertibility

There are two types of debentures:

Convertible debentures, which are convertible bonds or bonds that can be

converted into equity shares of the issuing company after a predetermined
period of time. "Convertibility" is a feature that corporations may add to the
bonds they issue to make them more attractive to buyers. In other words, it is a
special feature that a corporate bond may carry. As a result of the advantage a
buyer gets from the ability to convert; convertible bonds typically have lower
interest rates than non-convertible corporate bonds.

Convertible Debenture Mean

A type of loan issued by a company that can be converted into stock by the
 holder and, under certain circumstances, the issuer of the bond. By adding the
convertibility option the issuer pays a lower interest rate on the loan compared
to if there was no option to convert. These instruments are used by companies
to obtain the capital they need to grow or maintain the business.

Convertible debentures are different from convertible bonds because debentures

are unsecured; in the event of bankruptcy the debentures would be paid after
other fixed income holders. The convertible feature is factored into the
calculation of the diluted per-share metrics as if the debentures had been
converted. Therefore, a higher share count reduces metrics such as earnings per
share, which is referred to as dilution.

Non-convertible debentures, which are simply regular debentures, cannot be

converted into equity shares of the liable company. They are debentures without
the convertibility feature attached to them. As a result, they usually carry higher
interest rates than their convertible counterparts.

Compulsory Convertible Debenture - CCD

Compulsory Convertible Debenture - CCD Mean

A type of debenture in which the whole value of the debenture must be converted

into equity by a specified time. The compulsory convertible debenture's ratio of
conversion is decided by the issuer when the debenture is issued. Upon conversion,
the investors become shareholders of the company.

The main difference between convertible debentures and other convertible

securities is that owners of the debentures must convert their debentures
into equity, whereas in other types of convertible securities, the owner of the
debenture has an option.

Some CCDs, which are usually considered equity, are structured in a manner that
makes them more like debt. Often, the investor has a put option which requires the
issuing companies to buy back shares at a fixed price.
Types of debentures:

1. Simple or unsecured debentures: - These debentures are not given any security
on assets. They have no priority as compared to other creditors.
2. Secured or mortgage debentures: - these debentures are given a security on
assets of the debentures company. In case of default in the payment of interest or
principle amount, debenture holders can sell the assets in order to satisfy their
claims.
3. Bearer debentures: - These debentures are easily transferable. They are just like
negotiable instruments. The debenture is handed over to the purchaser without any
registration deed.
4. Registered debentures: - as compared to bearer debenture which is transferred by
mere delivery, registered debenture require a procedure to be followed for the
transfer.
5. Redeemable debenture: - these debentures are to be redeemed on the expiry of
ascertain period. The interest on the debenture is paid periodically but the principle
amount is returned after a fixed period.
6. Irredeemable debentures:- such debentures are not redeemable during the life
time of the company. There are payable either on the winding up of the company
or at the time of any default on the part of the company.
7. Convertible debenture: - sometimes convertible debenture is issued by a
company and the debenture holders are given an option to exchange the debenture
into enquiry shared after the lapse of a specified periods.

Advantages of debentures

1. Control of company is not surrendered to debenture holders because they do not

have any voting rights.
2. Trading on equity is possible as debenture holders get a lower rate of return than
the earnings of the company.
3. Interest on debenture is an allowable expenditure under income tax act, hence
incidence of tax on the company is decreased.
4. Debenture can be redeemed when company has surplus funds.

Disadvantages of debentures
1. Cost of raising capital through debentures is high of high stamps duty.
2. Common people cannot buy debenture as they are of high denominations.
3. They are not meant for companies earning greater than the rate of interest which
they are paying on the debentures.

Debenture Redemption Reserve Mean

A provision that was added to the Indian Companies Act of 1956 during an

amendment in the year 2000. The provision states that any Indian company that
issues debentures must create a debenture redemption service to protect investors
against the possibility of default by the company.
Debenture Redemption Reserve

Under the provision, debenture redemption reserves will be funded by company

profits every year until debentures are to be redeemed. If a company does not
create a reserve within 12 months of issuing the debentures, they will be required
to pay 2% interest in penalty to the debenture holders. Only debentures that were
issued after the amendment in 2000 are subject to the debenture redemption
service.

Redemption of Debentures:

A company may issue redeemable as well as irredeemable debentures. But

debentures issued by companies are usually redeemable debentures. There are two
important ways of redeeming the debentures according to the term of the issue.

Redemption of Debentures on a Fixed Date: In this method, payment to

debenture holder is made at the expiry of the stated period. A "Sinking Fund" is
created by debiting the "Profit & Loss Appropriation Account". The amount so
credited in the sinking fund account is invested in the gilt edged securities. These
securities are sold at the date of redemption of debentures. The sinking fund or
debenture fund account is then transferred to the General Reserve. Some
companies take up sinking fund insurance policy to redeem the debentures.
Redemption of Debentures on annual installments:

In this method, payment is made year after year, after a certain portion of the total
debentures by drawings. As such the revenue account is debited with the annual
drawings and the Redemption Fund Account are credited.

Sinking Fund:

It is a kind of reserve by which a provision is made to reduce a liability, e.g.

redemption of debentures or repayment of a loan. A sinking fund is a form of
specific reserve set aside for the redemption of a long term debt. The main purpose
of creating a sinking fund is to have a certain sum of money accumulated for a
future date by setting aside a certain sum of money every year. It is a kind of
specific reserve.

Whatever the object or the method of creating such a reserve may be, every year
certain sum of money is invested in such a way that with compound interests, the
exact amount to wipe off the liability or replace the wasting asset or to meet the
loss will be available. The amount to be invested every year can be known from
the compound interest annuity tables.

Alternatively an endowment policy may be taken out which matures on the date
when the amount required will be paid by the insurance company. The advantage
of this method is that a definite amount will be available, while in the case of
investment of fund in securities, the exact amount may not be available on account
of fall in the value of securities. After the liability is redeemed the sinking fund is
no longer required as it is the undistributed profit it may be distributed to the
shareholders or may be transferred to the General Reserve Account.

Debenture Redemption Reserve:

The newly introduced Section 117C in the Companies Act, 1956 by Companies
(Amendment) Act, 2000 has made a bold step in protecting the interests of
debenture holders by making it mandatory for the company to create security and
debenture redemption reserve. Accordingly, it shall now be mandatory for the
companies to create a debenture redemption reserve for the redemption of
debentures. The company shall have to credit adequate amount from out of its
profits every year till such debentures are redeemed.

The debenture reserve shall be used by the company only for the redemption of
debentures. Such redemption shall be in accordance with the terms and conditions
of the issue of debentures. The company shall pay interest due on outstanding
debentures as per the terms and conditions of the issue only. If a company fails to
redeem the debenture on due dates or on maturity, any or more than one or all the
debenture holders can make an application to the Tribunal and then Tribunal on
hearing all the parties concerned may direct by way of an order to redeem the
debentures forthwith by payment of principal and interest due on such debentures.

If default is made in complying with the order of the Tribunal, every officer of the
company who is in default shall be punishable with imprisonment which may
extend to 3 years and shall also be liable to a fine of not less than Rs. 500 for
every day during which such default continues.

Bond
In finance, a bond is a debt security, in which the authorized issuer owes the
holders a debt and, depending on the terms of the bond, is obliged to pay interest
(the coupon) and/or to repay the principal at a later date, termed maturity. A bond
is a formal contract to repay borrowed money with interest at fixed intervals.

Thus a bond is like a loan: the issuer is the borrower (debtor), the holder is the
lender (creditor), and the coupon is the interest. Bonds provide the borrower with
external funds to finance long-term investments, or, in the case of government
bonds, to finance current expenditure. Certificates of deposit (CDs) or commercial
paper are considered to be money market instruments and not bonds. Bonds must
be repaid at fixed intervals over a period of time.

Bonds and stocks are both securities, but the major difference between the two is
that (capital-) stockholders have an equity stake in the company (i.e., they are
owners), whereas bondholders have a creditor stake in the company (i.e., they are
lenders). Another difference is that bonds usually have a defined term, or maturity,
after which the bond is redeemed, whereas stocks may be outstanding indefinitely.
An exception is a consol bond, which is a perpetuity (i.e., bond with no maturity).

Issuing bonds

Bonds are issued by public authorities, credit institutions, companies and

supranational institutions in the primary markets. The most common process of
issuing bonds is through underwriting. In underwriting, one or more securities
firms or banks, forming a syndicate, buy an entire issue of bonds from an issuer
and re-sell them to investors. The security firm takes the risk of being unable to
sell on the issue to end investors. Primary issuance is arranged by bookrunners
who arrange the bond issue, have the direct contact with investors and act as
advisors to the bond issuer in terms of timing and price of the bond issue. The
bookrunners' willingness to underwrite must be discussed prior to opening books
on a bond issue as there may be limited appetite to do so.

In the case of Government Bonds, these are usually issued by auctions, where both
members of the public and banks may bid for bond. Since the coupon is fixed, but
the price is not, the percent return is a function both of the price paid as well as the
coupon.

Features of bonds
The most important features of a bond are:

 Nominal, principal or face amount — the amount on which the issuer pays
interest, and which, most commonly, has to be repaid at the end of the term.
Some structured bonds can have a redemption amount which is different to
the face amount and can be linked to performance of particular assets such
as a stock or commodity index, foreign exchange rate or a fund. This can
result in an investor receiving less or more than his original investment at
maturity.
 Issue price — the price at which investors buy the bonds when they are first
issued, which will typically be approximately equal to the nominal amount.
The net proceeds that the issuer receives are thus the issue price, less
issuance fees.
 Maturity date — the date on which the issuer has to repay the nominal
amount. As long as all payments have been made, the issuer has no more
obligation to the bond holders after the maturity date. The length of time
until the maturity date is often referred to as the term or tenor or maturity of
a bond. The maturity can be any length of time, although debt securities with
a term of less than one year are generally designated money market
instruments rather than bonds. Most bonds have a term of up to thirty years.
Some bonds have been issued with maturities of up to one hundred years,
and some even do not mature at all. In early 2005, a market developed in
euros for bonds with a maturity of fifty years. In the market for U.S.
Treasury securities, there are three groups of bond maturities:
o short term (bills): maturities up to one year;
o medium term (notes): maturities between one and ten years;
o long term (bonds): maturities greater than ten years.
 Coupon — the interest rate that the issuer pays to the bond holders. Usually
this rate is fixed throughout the life of the bond. It can also vary with a
money market index, such as LIBOR, or it can be even more exotic. The
name coupon originates from the fact that in the past, physical bonds were
issued which had coupons attached to them. On coupon dates the bond
holder would give the coupon to a bank in exchange for the interest
payment.

Bond issued by the Dutch East India Company in 1623

 The "quality" of the issue refers to the probability that the bondholders will
receive the amounts promised at the due dates. This will depend on a wide
range of factors.
o Indentures and Covenants — An indenture is a formal debt agreement
that establishes the terms of a bond issue, while covenants are the
clauses of such an agreement. Covenants specify the rights of
bondholders and the duties of issuers, such as actions that the issuer is
obligated to perform or is prohibited from performing. In the U.S.,
federal and state securities and commercial laws apply to the
enforcement of these agreements, which are construed by courts as
contracts between issuers and bondholders. The terms may be
changed only with great difficulty while the bonds are outstanding,
with amendments to the governing document generally requiring
approval by a majority (or super-majority) vote of the bondholders.
o High yield bonds are bonds that are rated below investment grade by
the credit rating agencies. As these bonds are more risky than
investment grade bonds, investors expect to earn a higher yield. These
bonds are also called junk bonds.
 coupon dates — the dates on which the issuer pays the coupon to the bond
holders. In the U.S. and also in the U.K. and Europe, most bonds are semi-
annual, which means that they pay a coupon every six months.
 Optionality: Occasionally a bond may contain an embedded option; that is, it
grants option-like features to the holder or the issuer:
o Callability — Some bonds give the issuer the right to repay the bond
before the maturity date on the call dates; see call option. These bonds
are referred to as callable bonds. Most callable bonds allow the issuer
to repay the bond at par. With some bonds, the issuer has to pay a
premium, the so called call premium. This is mainly the case for high-
yield bonds. These have very strict covenants, restricting the issuer in
its operations. To be free from these covenants, the issuer can repay
the bonds early, but only at a high cost.
o Putability — Some bonds give the holder the right to force the issuer
to repay the bond before the maturity date on the put dates; see put
option. (Note: "Putable" denotes an embedded put option; "Puttable"
denotes that it may be put.)
o call dates and put dates—the dates on which callable and putable
bonds can be redeemed early. There are four main categories.
 A Bermudan callable has several call dates, usually coinciding
with coupon dates.
  A European callable has only one call date. This is a special
case of a Bermudan callable.
 An American callable can be called at any time until the
maturity date.
 A death put is an optional redemption feature on a debt
instrument allowing the beneficiary of the estate of the
deceased to put (sell) the bond (back to the issuer) in the event
of the beneficiary's death or legal incapacitation. Also known as
a "survivor's option".
 sinking fund provision of the corporate bond indenture requires a certain
portion of the issue to be retired periodically. The entire bond issue can be
liquidated by the maturity date. If that is not the case, then the remainder is
called balloon maturity. Issuers may either pay to trustees, which in turn call
randomly selected bonds in the issue, or, alternatively, purchase bonds in
open market, then return them to trustees.
 convertible bond lets a bondholder exchange a bond to a number of shares of
the issuer's common stock.
 exchangeable bond allows for exchange to shares of a corporation other than
the issuer.

Types of Bond

Bond certificate for the state of South Carolina issued in 1873 under the state's
Consolidation Act.

The following descriptions are not mutually exclusive, and more than one of them
may apply to a particular bond.

 Fixed rate bonds have a coupon that remains constant throughout the life of
the bond.
  Floating rate notes (FRNs) have a variable coupon that is linked to a
reference rate of interest, such as LIBOR or Euribor. For example the
coupon may be defined as three month USD LIBOR + 0.20%. The coupon
rate is recalculated periodically, typically every one or three months.

 Zero-coupon bonds pay no regular interest. They are issued at a substantial

discount to par value, so that the interest is effectively rolled up to maturity
(and usually taxed as such). The bondholder receives the full principal
amount on the redemption date. An example of zero coupon bonds is Series
E savings bonds issued by the U.S. government. Zero-coupon bonds may be
created from fixed rate bonds by a financial institution separating "stripping
off" the coupons from the principal. In other words, the separated coupons
and the final principal payment of the bond may be traded separately. See IO
(Interest Only) and PO (Principal Only).

 Inflation linked bonds, in which the principal amount and the interest
payments are indexed to inflation. The interest rate is normally lower than
for fixed rate bonds with a comparable maturity (this position briefly
reversed itself for short-term UK bonds in December 2008). However, as the
principal amount grows, the payments increase with inflation. The United
Kingdom was the first sovereign issuer to issue inflation linked Gilts in the
1980s. Treasury Inflation-Protected Securities (TIPS) and I-bonds are
examples of inflation linked bonds issued by the U.S. government.

Receipt for temporary bonds for the state of Kansas issued in 1922

 Other indexed bonds, for example equity-linked notes and bonds indexed on
a business indicator (income, added value) or on a country's GDP.

 Asset-backed securities are bonds whose interest and principal payments are
backed by underlying cash flows from other assets. Examples of asset-
backed securities are mortgage-backed securities (MBS's), collateralized
mortgage obligations (CMOs) and collateralized debt obligations (CDOs).

 Subordinated bonds are those that have a lower priority than other bonds of
the issuer in case of liquidation. In case of bankruptcy, there is a hierarchy of
creditors. First the liquidator is paid, then government taxes, etc. The first
bond holders in line to be paid are those holding what is called senior bonds.
 After they have been paid, the subordinated bond holders are paid. As a
result, the risk is higher. Therefore, subordinated bonds usually have a lower
credit rating than senior bonds. The main examples of subordinated bonds
can be found in bonds issued by banks, and asset-backed securities. The
latter are often issued in tranches. The senior tranches get paid back first, the
subordinated tranches later.

 Perpetual bonds are also often called perpetuities or 'Perps'. They have no
maturity date. The most famous of these are the UK Consols, which are also
known as Treasury Annuities or Undated Treasuries. Some of these were
issued back in 1888 and still trade today, although the amounts are now
insignificant. Some ultra-long-term bonds (sometimes a bond can last
centuries: West Shore Railroad issued a bond which matures in 2361 (i.e.
24th century)) are virtually perpetuities from a financial point of view, with
the current value of principal near zero.

 Bearer bond is an official certificate issued without a named holder. In other

words, the person who has the paper certificate can claim the value of the
bond. Often they are registered by a number to prevent counterfeiting, but
may be traded like cash. Bearer bonds are very risky because they can be
lost or stolen. Especially after federal income tax began in the United States,
bearer bonds were seen as an opportunity to conceal income or assets.[3] U.S.
corporations stopped issuing bearer bonds in the 1960s, the U.S. Treasury
stopped in 1982, and state and local tax-exempt bearer bonds were
prohibited in 1983.

 Registered bond is a bond whose ownership (and any subsequent purchaser)

is recorded by the issuer, or by a transfer agent. It is the alternative to a
Bearer bond. Interest payments, and the principal upon maturity, are sent to
the registered owner.

Pacific Railroad Bond issued by City and County of San Francisco, CA.
May 1, 1865

Municipal bond is a bond issued by a state, U.S. Territory, city, local

government, or their agencies. Interest income received by holders of
municipal bonds is often exempt from the federal income tax and from the
 income tax of the state in which they are issued, although municipal bonds
issued for certain purposes may not be tax exempt.

 Book-entry bond is a bond that does not have a paper certificate. As

physically processing paper bonds and interest coupons became more
expensive, issuers (and banks that used to collect coupon interest for
depositors) have tried to discourage their use. Some book-entry bond issues
do not offer the option of a paper certificate, even to investors who prefer
them.

 Lottery bond is a bond issued by a state, usually a European state. Interest is

paid like a traditional fixed rate bond, but the issuer will redeem randomly
selected individual bonds within the issue according to a schedule. Some of
these redemptions will be for a higher value than the face value of the bond.

 War bond is a bond issued by a country to fund a war.

 Serial bond is a bond that matures in installments over a period of time. In

effect, a $100,000, 5-year serial bond would mature in a $20,000 annuity
over a 5-year interval.

 Revenue bond is a special type of municipal bond distinguished by its

guarantee of repayment solely from revenues generated by a specified
revenue-generating entity associated with the purpose of the bonds. Revenue
bonds are typically "non-recourse," meaning that in the event of default, the
bond holder has no recourse to other governmental assets or revenues.

Bonds issued in foreign currencies

Some companies, banks, governments, and other sovereign entities may decide to
issue bonds in foreign currencies as it may appear to be more stable and
predictable than their domestic currency. Issuing bonds denominated in foreign
currencies also gives issuers the ability to access investment capital available in
foreign markets. The proceeds from the issuance of these bonds can be used by
companies to break into foreign markets, or can be converted into the issuing
company's local currency to be used on existing operations through the use of
foreign exchange swap hedges. Foreign issuer bonds can also be used to hedge
foreign exchange rate risk. Some foreign issuer bonds are called by their
nicknames, such as the "samurai bond." These can be issued by foreign issuers
looking to diversify their investor base away from domestic markets. These bond
issues are generally governed by the law of the market of issuance, e.g., a samurai
bond, issued by an investor based in Europe, will be governed by Japanese law.
Not all of the following bonds are restricted for purchase by investors in the market
of issuance.

 Eurodollar bond, a U.S. dollar-denominated bond issued by a non-U.S.

entity outside the U.S
 Yankee bond, a US dollar-denominated bond issued by a non-US entity in
the US market
 Kangaroo bond, an Australian dollar-denominated bond issued by a non-
Australian entity in the Australian market
 Maple bond, a Canadian dollar-denominated bond issued by a non-Canadian
entity in the Canadian market
 Samurai bond, a Japanese yen-denominated bond issued by a non-Japanese
entity in the Japanese market
 Uridashi bond, a non-yen-demoninated bond sold to Japanese retail
investors.
 Shibosai Bond is a private placement bond in Japanese market with
distribution limited to institutions and banks.
 Shogun bond, a non-yen-denominated bond issued in Japan by a non-
Japanese institution or government
 Bulldog bond, a pound sterling-denominated bond issued in London by a
foreign institution or government
 Matrioshka bond, a Russian rouble-denominated bond issued in the Russian
Federation by non-Russian entities. The name derives from the famous
Russian wooden dolls, Matrioshka, popular among foreign visitors to Russia
 Arirang bond, a Korean won-denominated bond issued by a non-Korean
entity in the Korean market
 Kimchi bond, a non-Korean won-denominated bond issued by a non-Korean
entity in the Korean market
 Formosa bond, a non-New Taiwan Dollar-denominated bond issued by a
non-Taiwan entity in the Taiwan market
 Panda bond, a Chinese renminbi-denominated bond issued by a non-China
entity in the People's Republic of China market

Trading and valuing bonds

Bond valuation
The interest rate that the issuer of a bond must pay is influenced by a variety of
factors, such as current market interest rates, the length of the term and the
creditworthiness of the issuer.

These factors are likely to change over time, so the market price of a bond will
vary after it is issued. This price is expressed as a percentage of nominal value.
Bonds are not necessarily issued at par (100% of face value, corresponding to a
price of 100), but bond prices converge to par when they approach maturity (if the
market expects the maturity payment to be made in full and on time) as this is the
price the issuer will pay to redeem the bond. This is referred to as "Pull to Par". At
other times, prices can be above par (bond is priced at greater than 100), which is
called trading at a premium, or below par (bond is priced at less than 100), which
is called trading at a discount. Most government bonds are denominated in units of
$1000 in the United States, or in units of £100 in the United Kingdom. Hence, a
deep discount US bond, selling at a price of 75.26, indicates a selling price of
$752.60 per bond sold. (Often, in the US, bond prices are quoted in points and
thirty-seconds of a point, rather than in decimal form.) Some short-term bonds,
such as the U.S. Treasury Bill, are always issued at a discount, and pay par amount
at maturity rather than paying coupons. This is called a discount bond.

The market price of a bond is the present value of all expected future interest and
principal payments of the bond discounted at the bond's redemption yield, or rate
of return. That relationship defines the redemption yield on the bond, which
represents the current market interest rate for bonds with similar characteristics.
The yield and price of a bond are inversely related so that when market interest
rates rise, bond prices fall and vice versa. Thus the redemption yield could be
considered to be made up of two parts: the current yield (see below) and the
expected capital gain or loss: roughly the current yield plus the capital gain
(negative for loss) per year until redemption.

The market price of a bond may include the accrued interest since the last coupon
date. (Some bond markets include accrued interest in the trading price and others
add it on explicitly after trading.) The price including accrued interest is known as
the "full" or "dirty price". ( Accrual bond.) The price excluding accrued interest is
known as the "flat" or "clean price".

The interest rate adjusted for (divided by) the current price of the bond is called the
current yield (this is the nominal yield multiplied by the par value and divided by
the price). There are other yield measures that exist such as the yield to first call,
yield to worst, yield to first par call, yield to put, cash flow yield and yield to
maturity.

The relationship between yield and maturity for otherwise identical bonds is called
a yield curve. A yield curve is essentially a measure of the term structure of bonds.

Bonds markets, unlike stock or share markets, often do not have a centralized
exchange or trading system. Rather, in most developed bond markets such as the
U.S., Japan and western Europe, bonds trade in decentralized, dealer-based over-
the-counter markets. In such a market, market liquidity is provided by dealers and
other market participants committing risk capital to trading activity. In the bond
market, when an investor buys or sells a bond, the counterparty to the trade is
almost always a bank or securities firm acting as a dealer. In some cases, when a
dealer buys a bond from an investor, the dealer carries the bond "in inventory." The
dealer's position is then subject to risks of price fluctuation. In other cases, the
dealer immediately resells the bond to another investor.

Bond markets can also differ from stock markets in that, in some markets,
investors sometimes do not pay brokerage commissions to dealers with whom they
buy or sell bonds. Rather, the dealers earn revenue by means of the spread, or
difference, between the price at which the dealer buys a bond from one investor—
the "bid" price—and the price at which he or she sells the same bond to another
investor—the "ask" or "offer" price. The bid/offer spread represents the total
transaction cost associated with transferring a bond from one investor to another.

Investing in bonds

Bonds are bought and traded mostly by institutions like central banks, sovereign
wealth funds, pension funds, insurance companies and banks. Most individuals
who want to own bonds do so through bond funds. Still, in the U.S., nearly 10% of
all bonds outstanding are held directly by households.

Sometimes, bond markets rise (while yields fall) when stock markets fall. More
relevantly, the volatility of bonds (especially short and medium dated bonds) is
lower than that of stocks. Thus bonds are generally viewed as safer investments
than stocks, but this perception is only partially correct. Bonds do suffer from less
day-to-day volatility than stocks, and bonds' interest payments are often higher
than the general level of dividend payments. Bonds are liquid  – it is fairly easy to
sell one's bond investments, though not nearly as easy as it is to sell stocks  – and
the comparative certainty of a fixed interest payment twice per year is attractive.
Bondholders also enjoy a measure of legal protection: under the law of most
countries, if a company goes bankrupt, its bondholders will often receive some
money back (the recovery amount), whereas the company's stock often ends up
valueless. However, bonds can also be risky:

 Fixed rate bonds are subject to interest rate risk, meaning that their market
prices will decrease in value when the generally prevailing interest rates rise.
Since the payments are fixed, a decrease in the market price of the bond
means an increase in its yield. When the market interest rate rises, the
market price of bonds will fall, reflecting investors' ability to get a higher
interest rate on their money elsewhere — perhaps by purchasing a newly
issued bond that already features the newly higher interest rate. Note that
this drop in the bond's market price does not affect the interest payments to
the bondholder at all, so long-term investors who want a specific amount at
the maturity date need not worry about price swings in their bonds and do
not suffer from interest rate risk.

Bonds are also subject to various other risks such as call and prepayment risk,
credit risk, reinvestment risk, liquidity risk, event risk, exchange rate risk, volatility
risk, inflation risk, sovereign risk and yield curve risk.

Price changes in a bond will also immediately affect mutual funds that hold these
bonds. If the value of the bonds held in a trading portfolio has fallen over the day,
the value of the portfolio will also have fallen. This can be damaging for
professional investors such as banks, insurance companies, pension funds and asset
managers (irrespective of whether the value is immediately "marked to market" or
not). If there is any chance a holder of individual bonds may need to sell his bonds
and "cash out", interest rate risk could become a real problem. (Conversely, bonds'
market prices would increase if the prevailing interest rate were to drop, as it did
from 2001 through 2003.) One way to quantify the interest rate risk on a bond is in
terms of its duration. Efforts to control this risk are called immunization or
hedging.

 Bond prices can become volatile depending on the credit rating of the issuer
- for instance if the credit rating agencies like Standard & Poor's and
Moody's upgrade or downgrade the credit rating of the issuer. A downgrade
will cause the market price of the bond to fall. As with interest rate risk, this
risk does not affect the bond's interest payments (provided the issuer does
not actually default), but puts at risk the market price, which affects mutual
funds holding these bonds, and holders of individual bonds who may have to
sell them.
  A company's bondholders may lose much or all their money if the company
goes bankrupt. Under the laws of many countries (including the United
States and Canada), bondholders are in line to receive the proceeds of the
sale of the assets of a liquidated company ahead of some other creditors.
Bank lenders, deposit holders (in the case of a deposit taking institution such
as a bank) and trade creditors may take precedence.

There is no guarantee of how much money will remain to repay bondholders. As

an example, after an accounting scandal and a Chapter 11 bankruptcy at the giant
telecommunications company Worldcom, in 2004 its bondholders ended up being
paid 35.7 cents on the dollar. In a bankruptcy involving reorganization or
recapitalization, as opposed to liquidation, bondholders may end up having the
value of their bonds reduced, often through an exchange for a smaller number of
newly issued bonds.

 Some bonds are callable, meaning that even though the company has agreed
to make payments plus interest towards the debt for a certain period of time,
the company can choose to pay off the bond early. This creates reinvestment
risk, meaning the investor is forced to find a new place for his money, and
the investor might not be able to find as good a deal, especially because this
usually happens when interest rates are falling.

Company Account: Redemption of Debentures

 
Explain briefly the various methods of redemption of debentures.

Repayment or discharge of liability on account of debentures is called

redemption of debentures. The method of debenture redemption adopted
determines to a very large extent, the actual accounting for redemption as well as
the marshalling of resources for the same.

There are broadly four methods for the redemption of debentures which are as
follows:

1. Lump-sum payment method: In this method, redemption of debentures is

done by repayment in one lump sum after the expiry of a stipulated period.
The total amount payable to debenture holders is decided at the time of
 issue of debentures (i.e. debentures will be redeemed at par or at premium).
Usually a company creates sinking fund or an insurance policy fund for the
redemption of debentures.
2. Drawings of Lots method: In order to reduce the liability of debentures,
company may repay the debentures in some instalments. A certain amount
of debentures is redeemed at regular interval of time during the lifetime of
the debentures by drawings of lots.
3. Purchase in the Open Market: The company from the open market can
purchase its own Debentures. Debentures so purchased may be cancelled
immediately or may be kept as an investment, which will be cancelled
later. It may beneficial for the company if it purchases its own debentures
at a discount from the open market.
4. Conversion Method: Usually debentures are redeemed in cash but
sometimes debenture holder are given an option to get their debentures
converted either in shares or for new debentures of the company. The
redemption of debentures by means of shares or new debentures is known
as redemption by conversion. Debentures, which carry such right, are
called ‘Convertible Debentures’.

Distinguish between redemption of debentures out of capital and out of

profit.

Redemption out of Capital:

When debentures are redeemed out of capital, no transfer is made to general

reserve or debenture redemption reserve account. In this method it is assumed
that the company has sufficient funds to redeem the debentures. So the profits are
not utilised to replace the debentures. It affects adversely to the Working Capital
of the company. The following entries are passed when debentures are redeemed
out of capital: -

For amount of debentures due to Debenture holders:

1.
  (a) when debentures are redeemable at par:
  % Debentures A/c Dr.
  To Debenture holders A/c
  (b) when debentures are redeemable at premium:
  % Debentures A/c Dr.
  Premium on Redemption of Debentures A/c Dr.
  To Debenture holders A/c
2. For payment to Debenture holders:
  Debenture holders A/c Dr.
  To Bank A/c
Redemption out of Profit:

When it is intended to redeem the debentures out of profits, a part of profits

available for distribution of dividends is withheld by the company every year to
be used for redemption purposes as and when the need arises for the same. There
are two alternatives available to the company in this regard namely: (a) the
amount of divisible profits withheld by the company may be retained in the
business itself as a source of internal financing. (b) The amount of divisible
profits withheld from distribution as dividend may be invested either (i) in readily
marketable securities or (ii) in taking out insurance policy to provide funds when
required. The following entries are passed when debentures are redeemed out of
profit:

For amount of debentures due to Debenture holders:

1.
  (a) when debentures are redeemable at par:
  % Debentures A/c Dr.
  To Debenture holders A/c
  (b) when debentures are redeemable at premium:
  % Debentures A/c Dr.
  Premium on Redemption of Debentures A/c Dr.
  To Debenture holders A/c
2. For payment to Debenture holders:
  Debenture holders A/c Dr.
  To Bank A/c
3. For profit transferred to General Reserve
  Profit & Loss Appropriation A/c Dr.
  To General Reserve A/c
Explain with the help of journal entries, how Sinking Fund Method for
redemption of Debentures is used?

A sinking fund may be defined as a fund created by a charge against or

appropriation of profits and represented by specific investments. The accounting
entries for creating a Sinking Fund would be as under:

First Year:
I.
  On the date of issue of Debentures:
  1. For issue of Debentures
  Bank A/c Dr.
  To % Debentures A/c
  At the end of first year:
  2. For amount of Sinking Fund Charged to Profit & Loss
Appropriation A/c
  Profit & Loss Appropriation A/c Dr.
  To Sinking Fund A/c
  3. For Investments made for the amount of sinking fund
  Sinking Fund Investment A/c Dr. (with the amount of sinking fund)
  To Bank A/c
II. At the end of second and subsequent years during the life of the
debentures excepting last year:
  1. For receipt of interest on investment
  Bank A/c Dr.
  To Interest on Sinking Fund Investment A/c
  2. For interest on investment t/f to sinking fund
  Interest on Sinking Fund Investment A/c Dr.
  To Sinking Fund A/c
  3. For amount of Sinking Fund Charged to Profit & Loss
Appropriation A/c
  Profit & Loss Appropriation A/c Dr.
  To Sinking Fund A/c
  4. For Investments made for the amount of sinking fund
  Sinking Fund Investment A/c Dr. (with the total amount of annual sinking
fund + interest)
  To Bank A/c
III. Last year:
  1. For receipt of interest on investment
  Bank A/c Dr.
  To Interest on Sinking Fund Investment A/c
  2. For interest on investment t/f to sinking fund
  Interest on Sinking Fund Investment A/c Dr.
  To Sinking Fund A/c
  3. For amount of Sinking Fund Charged to Profit & Loss
Appropriation A/c
  Profit & Loss Appropriation A/c Dr.
  To Sinking Fund A/c
  4. For sale of investment
  Bank A/c Dr.
  To Sinking Fund Investment A/c
  5. For gain on sale of investment
  Sinking Fund Investment A/c Dr.
  To Sinking Fund A/c
  Or
  For loss on sale of investment
  Sinking Fund A/c Dr.
  To Sinking Fund Investment A/c
  6. For amount of debentures due to Debenture holders:
  (a) when debentures are redeemable at par:
  % Debentures A/c Dr.
  To Debenture holders A/c
  (b) when debentures are redeemable at premium:
  % Debentures A/c Dr.
  Premium on Redemption of Debentures A/c Dr.
  To Debenture holders A/c
  7. For payment to Debenture holders:
  Debenture holders A/c Dr.
  To Bank A/c
  8. For transfer of Sinking Fund to General reserve
  Sinking Fund A/c Dr.
  To General Reserve A/c
Conclusion

At Last we say that Debentures are generally freely transferable by the

debenture holder. Debenture holders have no voting rights and the interest paid to
them is a charge against profit in the company's financial statements.

Thus, Convertible Debenture a type of loan issued by a company that can be

converted into stock by the holder and, under certain circumstances, the issuer of
the bond. By adding the convertibility option the issuer pays a lower interest rate
on the loan compared to if there was no option to convert. These instruments are
used by companies to obtain the capital they need to grow or maintain the business.
Thus, Non-convertible debentures, which are simply regular debentures, cannot
be converted into equity shares of the liable company. They are debentures without
the convertibility feature attached to them. As a result, they usually carry higher
interest rates than their convertible counterparts.

Thus a bond is like a loan: the issuer is the borrower (debtor), the holder is the
lender (creditor), and the coupon is the interest. Bonds provide the borrower with
external funds to finance long-term investments, or, in the case of government
bonds, to finance current expenditure. Certificates of deposit (CDs) or commercial
paper are considered to be money market instruments and not bonds. Bonds must
be repaid at fixed intervals over a period of time.

Recommendations
This study tells about Debentures and Bonds.This report tells about the
advantages and disadvantages of debentures and Debenture Redemption Reserve
and also tells about the features and types of bonds.

The Debentures has Control of company is not surrendered to debenture holders

because they do not have any voting rights. The Debentures help Trading on equity
is possible as debenture holders get a lower rate of return than the earnings of the
company. The Debentures has Cost of raising capital through debentures is high of
high stamps duty. It has common people cannot buy debenture as they are of high
denominations. Under the provision, debenture redemption reserves will be funded
by company profits every year until debentures are to be redeemed. If a company
does not create a reserve within 12 months of issuing the debentures, they will be
required to pay 2% interest in penalty to the debenture holders. Only debentures
that were issued after the amendment in 2000 are subject to the debenture
redemption service.

A bond has nominal, principal or face amount and maturity date. Bonds provide
the borrower with external funds to finance long-term investments, or, in the case
of government bonds, to finance current expenditure. Certificates of deposit (CDs)
or commercial paper are considered to be money market instruments and not
bonds. Bonds must be repaid at fixed intervals over a period of time.