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August 29, 2013

Essay on Debentures and Mortgage Bonds



Debentures and Mortgage Bonds
There are a number of differences between debentures and mortgage bonds.  Bonds are considered more secure as opposed to debentures which is an unsafe loan offered to a company.
Bonds are not convertible while debentures can easily be conferred. Bonds are issued by public companies while debentures are offered by private companies. More importantly, bond is considered to be a long-term debt instrument while debenture is a short-term.

 There are two types of debentures namely convertible debentures, which are convertible bonds or bonds that can be converted into equity shares of the issuing company after a prearranged period of time. "Convertibility" is an aspect that corporations may add to the bonds they issue to make them more attractive to buyers. Non-convertible debentures can be defined as simply regular debentures without having an ability to be converted into equity shares of the liable company. Consequently, they normally have higher interest rates than their convertible counterparts.(Sullivan, 2003)
On the other hand, the most important features of a bond include that they are nominal, principle, 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 may carry a redemption amount which is different from the face amount and can be associated with the performance of specific assets such as a stock or commodity index, foreign exchange rate or a fund. In this context, the investor may end up receiving less or more than his original investment at maturity.

References
O'Sullivan, Arthur; Sheffrin, Steven M. (2003). Economics: Principles in action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. pp. 197, 507

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