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non-convertible debentures or NCDs are debentures which can’t be converted into shares or equities. NCDs are unsecured bonds and usually have higher interests rates.
Non-convertible debentures explained more later in this article but at first we have to know about what is debenture.
What is debenture?
A debenture is a type of bond. However, the term debenture only applies to an unsecured bond. Therefore, all debentures can be bonds, but not all bonds are debentures.
In business or corporate financing, unsecured debentures are typically riskier requiring the payment of higher coupons.
Since debentures have no collateral backing, debentures must rely on the creditworthiness and reputation of the issuer for support.
Both corporations and governments frequently issue debentures to raise capital or funds.
Some debentures can convert to equity shares called convertible debentures, while others cannot convert call non-convertible debentures.
Non-convertible Debentures Explained
As explained, Non-convertible debentures are unsecured bonds or traditional debentures that cannot be converted into equity of the issuing corporation.
Investors are rewarded with a higher interest rate to compensate for the shortage of convertible investors as compared to convertible debentures.
NCDs are of two types, first is secured NCD and second is unsecured NCD. Secured NCDs are completely secured, which means there are no chances of being a defaulter of company and investors money will be safe.
Non secure NCDs are not secure, which means the are not safe and company can become a defaulter as well.
Non-convertible Debentures for Investors
Secured NCDs is a very safe option for investors and can get lot of profit in it. Non-convertible debentures is a kind of huge gain investment.
Huge gain means that, in NCDs, investors make so much profit that they never make in fixed deposit.
Secured NCDs are better option for investment.
How NCD work?
Now lets talk about how NCD work and investors can make money in it.
In this you buy the debentures from the company and in return you give the money to the company.
Suppose, a company needs a fund through which a company can grow their business in the market. So the company issues their debentures in the market, which is worth ₹ 1000 from the price of the purchase.
A company issues its debentures only for a fixed time, company will decide the date of maturity.
Company will pays investors princimple amount plus interest earned, after maturity. A company pays interest in 3 ways to investors.
- Monthly – every month.
- Quarterly – every three months.
- Anually – every year.
Till the date of maturity, if investors not take interests, then they get their money together with interest.