Advantage of Debentures

Debentures are cheaper source of funds due to the following reasons:

  • Interest cost is usually less than the dividend paid on shares Issuance cost is less than the cost for any other form security Tax benefits are available
  • Debentures do not dilute the control of existing shareholders since debenture holders do not have any voting rights
  • Debentures are preferred for the fixed rate of interest and since they can be redeemed when there is surplus
  • Debentures allow trading on equity
  • Debentures provide higher rates of financial return and are usually much more rewarding than government bonds or bank investments.
  • At the end of the lending period, issuing companies usually offer the choice of converting the debentures for shares (stock or equity).
  • Interest is paid to investors whether or not the issuing company makes a profit or not.
  • Debentures are transferable from investor to investor.
  • The cost of debt is lower than the cost of equity or preference shares as interest is tax deductible.

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