Practicing Success
When a company want to purchase its own debenture for the purpose of cancellation, the method of debenture redemption which can be used is: |
Payment in lumpsum Payment in instalments Purchase in open market Conversion into shares or new debentures |
Purchase in open market |
The correct answer is Option (3) - Purchase in open market. The four ways of redemption of debentures are: 2) Payment in installments: Debentures are redeemed by making periodic payments, often in multiple installments, according to a predetermined schedule. 3) Purchase in the open market: The company can buy back its own debentures from the open market if they are available for purchase. When a company purchases its own debentures in the open market for the purpose of immediate cancellation, the purchase and cancellation of such debentures are termed as redemption by purchase in the open market. The advantage of such an option is that a company can redeem the debentures at its convenience whenever it has surplus funds. Secondly, the company can purchase them when they are available in the market at a discount. When the debentures are purchased from the market at a discount and cancelled, there is profit for the company. 4) By conversion into shares or new debentures: Debenture holders may have the option to convert their debentures into either equity shares or new debentures issued by the company. |