Which of the following is a merit of debentures?

(A) Preferred by investors who want fixed income

(B) Debentures carry voting rights

(C) Debentures are fixed charge funds and do not participate in profits of the company

(D) Financing through debentures is less costly as compared to cost of preference or equity capital

Choose the correct answer from the options given below.

(A), (C) and (D) only

The correct answer is option 1- (A), (C) and (D) only.

B is not a merit of debentures as debentures does not carry voting rights.

Debentures are an important instrument for raising long term debt capital. A company can raise funds through issue of debentures, which bear a fixed rate of interest. The debenture issued by a company is an acknowledgment that the company  has borrowed a certain amount of money, which it promises to repay at a future date. Debenture holders are, therefore, termed as creditors of the company. Debenture holders are paid a fixed stated amount of interest at specified intervals say six months or one year. The merits of raising funds through debentures are given as follows:

• (i) It is preferred by investors who want fixed income at lesser risk;
• (ii) Debentures are fixed charge funds and do not participate in profits of the company;
• (iii) The issue of debentures is suitable in the situation when the sales and earnings are relatively stable;
• (iv) As debentures do not carry voting rights, financing through debentures does not dilute control of equity shareholders on management;
• (v) Financing through debentures is less costly as compared to cost of preference or equity capital as the interest payment on debentures is tax deductible