Debenture is a type of source of financing. In the issuance of debenture the interest rate, maturity period, face value collateral amount are pre-specified. Debenture is a letter of promise provided by company to the debenture holders in which the company promise to pay pre specified interest amount during the life of the debenture and principle amount at the maturity period.
1. Long-Term source of financing:
Debenture is considered as a long term source of financing. The cost of debenture is lower than the cost of equity. Therefore, the company prefer to issue debenture to purchase fixed assets such as plant & machinery, land, building etc.
2. Low cost of financing:
The cost of debenture is often lower than the cost of capital. And the interest expenses can be deducted from the taxable income so it reduces the overall cost of financing.
3. No effect on control:
The issuance of the debenture do not effect on the shareholders ownership and their control position. Because the debt holders do not have right to become the member of BOD and they also do not have voting right.
4. No effect on additional profit:
The cost of debenture is pre-specified so interest payment is fixed for debt holders. Due to this reason debt holders only receive the interest payment specified in contract even if company earn too much profit.
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