Which of the following statements are true about Debentures?
(A) Specified rate of interest on debentures is also called coupon rate
(B) The floating interest rate is usually tagged with the bank rate
(C) Debenture is a part of the owned capital of a company
(D) Unsecured debentures are also known as naked debentures
(E) Debenture includes debenture inventory and bonds
(F) Irredeemable debentures are also known as perpetual debentures
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 2
The correct answer is option 2- (A), (B), (D), (E) and (F) only.
(A) Specified rate of interest on debentures is also called coupon rate- This is true. Specific Coupon Rate Debentures are issued with a predetermined interest rate, known as the coupon rate. This rate can be fixed or floating, with floating rates often tied to the bank rate.
(B) The floating interest rate is usually tagged with the bank rate- This is true. Specific Coupon Rate Debentures are issued with a specified rate of interest, which is called the coupon rate. The specified rate may either be fixed or floating. The floating interest rate is usually tagged with the bank rate.
(C) Debenture is a part of the owned capital of a company- This is false. A ‘share’ represents ownership of the company whereas a debenture is only acknowledgement of Debt. A share is a part of the owned capital whereas a debenture is a part of borrowed capital.
(D) Unsecured debentures are also known as naked debentures- This is true. Unsecured debentures do not have a specific charge on the assets of the company. However, a floating charge may be created on these debentures by default. Normally, these kinds of debentures are not issued. Unsecured debentures are also known as naked debentures.
(E) Debenture includes debenture inventory and bonds- This is true. Debenture is a written instrument acknowledging a debt under the common seal of the company. It contains a contract for repayment of principal after a specified period or at intervals or at the option of the company and for payment of interest at a fixed rate payable usually either half-yearly or yearly on fixed dates. According to section 2(30) of The Companies Act, 2013 ‘Debenture’ includes Debenture Inventory, Bonds and any other securities of a company whether constituting a charge on the assets of the company or not.
(F) Irredeemable debentures are also known as perpetual debentures- This is true. Irredeemable debentures are also known as Perpetual Debentures because the company does not give any undertaking for the repayment of money borrowed by issuing such debentures. These debentures are repayable on the winding-up of a company or on the expiry of a long period.