Debt or Loan Instruments

Apart from shares, there are many other financial instruments (securities) used for raising capital. Debentures or bonds are debt instruments which pay interest over their life time and are used by corporates to raise medium or long term debt capital. If you prefer fixed income, you may invest in these instruments which may give you higher rate of interest than bank fixed deposit, because of the higher risk.

Debt or Loan Instruments are

A)     Corporate debt

a)      Debentures are instrument issued by companies to raise debt capital. As an investor, you lend you money to the company, in return for its promise to pay you interest at a fixed rate (usually payable half yearly on specific dates) and to repay the loan amount on a specified maturity date.Normally specific asset(s) of the company are held (secured) in favour of debenture holders. This can be liquidated, if the company is unable to pay the interest or principal amount. Unlike loans, you can buy or sell these instruments in the market.

              Types of debentures that are offered are as follows:

  • Non convertible debentures (NCD) – Total amount is redeemed by the Issuer
  • Partially convertible debentures (PCD) – Part of it is redeemed and the remaining is converted to equity shares as per the specified terms
  • Fully convertible debentures (FCD) – Whole value is converted into equity at a specified price

 

b)      Bonds are broadly similar to debentures. They are issued by companies, financial institutions, municipalities or government companies and are normally not secured by any assets of the company (unsecured).

             Types of bonds

  • Regular Income Bonds provide a stable source of income at regular, predetermined intervals
  • Tax-Saving Bonds offer tax exemption up to a specified amount of investment, depending on the scheme and the Government notification.

Examples is Infrastructure Bonds under Section 88 of the Income Tax Act, 1961

 

B)     Government debt:

Government securities (G-Secs) are instruments issued by Government of India to raise money. G Secs pays interest at fixed rate on specific dates on half-yearly basis. It is available in wide range of maturity, from short dated (one year) to long dated (up to thirty years). Since it is sovereign borrowing, it is free from risk of default (credit risk). You can subscribe to these bonds through RBI or buy it in stock exchange.

 

C)     Money Market instruments (loan instruments up to one year tenure)

  • Treasury Bills (T-bills) are short term instruments issued by the Government for its cash management. It is issued at discount to face value and has maturity ranging from 14 to 365 days
  • Commercial Papers (CPs) are short term unsecured instruments issued by the companies for their cash management. It is issued at discount to face value and has maturity ranging from 90 to 365 days.
  • Certificate of Deposits (CDs) are short term unsecured instruments issued by the banks for their cash management. It is issued at discount to face value and has maturity ranging from 90 to 365 days.