National Institute of Business Management

Chennai - 020
FIRST SEMESTER EMBA/ MBA
Subject : Financial Management

1)Explain the objectives of financial management, interphase between finance

and other functions.

Ans: Objectives of Financial Management

There are objectives or reasons firms implement these management strategies to grow their
business.

a)Profit Maximization:-One of the reasons a company employs a financial manager is

to maximize profit while managing the finance of the company. The gain can be in the
short or long-term. But the main focus is that the individual or department handling the
financial issues of the company must ensure that the company in question is making
sufficient profit.

b) Proper Mobilization of Finance:-The collection of funds to run the business is also an

integral part of financial management that the manager needs to handle appropriately. Once the
manager concludes the estimation of the amount needed for a business process, the required
amount can then be requested from any legal sources such as debenture, shares or even request
for a bank loan. But the point is that there should be a proper balance between the money the
firm has and the amount borrowed.

c)The Company’s Survival:-The survival of the company is essential. That is one of the
reasons the management considers hiring financial managers in the first place. The manager has
to make adequate financial decisions to ensure the company is successful.

d) Proper Coordination:-There must be a proper understanding and corporation among the

various departments. The finance department must understand and agree with other departments
within the company for the business to function smoothly.

e)Lowers Cost of Capital:-Financial managers also try their very best to reduce the cost of
capital, which is something that is vital to the business. They ensure money borrowed attracts
little interest rates so the company can maximize profit.
 Interface Between Finance and Other Functions

Finance is the study of money management, the acquiring of funds (cash) and the directing of
these funds to meet particular objectives. Good financial management helps businesses to
maximize returns while simultaneously minimizing risks.

Financial management is an integral part of overall management and not merely a staff function.
It is not only confined to fund raising operations but extends beyond it to cover utilization of
funds and monitoring its uses. These functions influence the operations of other crucial
functional areas of the firm such as production, marketing and human resources. Hence,
decisions in regard to financial matters must be taken after giving thoughtful consideration to
interests of various business activities. Finance manager has to see things as a part of a whole
and make financial decisions within the framework of overall corporate objectives and policies.

Let us discuss in greater detail the reasons why knowledge of the financial implications of their
decisions is important for the non-finance managers. One common factor among all managers is
that they use resources and since resources are obtained in exchange for money, they are in effect
making the investment decision and in the process of ensuring that the investment is effectively
utilized they are also performing the control function.

Marketing-Finance Interface
There are many decisions, which the Marketing Manager takes which have a significant location,
etc. In all these matters assessment of financial implications is inescapable impact on the
profitability of the firm. For example, he should have a clear understanding of the impact the
credit extended to the customers is going to have on the profits of the company. Otherwise in his
eagerness to meet the sales targets he is liable to extend liberal terms of credit, which is likely to
put the profit plans out of gear. Similarly, he should weigh the benefits of keeping a large
inventory of finished goods in anticipation of sales against the costs of maintaining that
inventory. Other key decisions of the Marketing Manager, which have financial implications,
are:

 Pricing
 Product promotion and advertisement
 Choice of product mix
 Distribution policy.

Production-Finance Interface
As we all know in any manufacturing firm, the Production Manager controls a major part of the
investment in the form of equipment, materials and men. He should so organize his department
that the equipments under his control are used most productively, the inventory of work-in-
process or unfinished goods and stores and spares is optimized and the idle time and work
stoppages are minimized. If the production manager can achieve this, he would be holding the
cost of the output under control and thereby help in maximizing profits. He has to appreciate the
fact that whereas the price at which the output can be sold is largely determined by factors
external to the firm like competition, government regulations, etc. the cost of production is more
amenable to his control. Similarly, he would have to make decisions regarding make or buy, buy
or lease etc. for which he has to evaluate the financial implications before arriving at a decision.

Top Management-Finance Interface

The top management, which is interested in ensuring that the firm’s long-term goals are met,
finds it convenient to use the financial statements as a means for keeping itself informed of the
overall effectiveness of the organization. We have so far briefly reviewed the interface of finance
with the non-finance functional disciplines like production, marketing etc. Besides these, the
finance function also has a strong linkage with the functions of the top management. Strategic
planning and management control are two important functions of the top management. Finance
function provides the basic inputs needed for undertaking these activities.

Economics – Finance Interface

The field of finance is closely related to economics. Financial managers must understand the
economic framework and be alert to the consequences of varying levels of economic activity and
changes in economic policy. They must also be able to use economic theories as guidelines for
efficient business operation. The primary economic principle used in managerial finance is
marginal analysis, the principle that financial decisions should be made and actions taken only
when the added benefits exceed the added costs. Nearly all-financial decisions ultimately come
down to an assessment of their marginal benefits and marginal costs.

Accounting – Finance Interface

The firm’s finance (treasurer) and accounting (controller) activities are typically within the
control of the financial vice president (CFO). These functions are closely related and generally
overlap; indeed, managerial finance and accounting are often not easily distinguishable. In small
firms the controller often carries out the finance function, and in large firms many accountants
are closely involved in various finance activities. However, there are two basic differences
between finance and accounting; one relates to the emphasis on cash flows and the other to
decision making.

2)Explain the Indian Financial Systems.

Ans:- Indian financial markets are sub-divided broadly into money markets (that deal in short-
term funds) and capital markets (that deal in long-term funds).Structurally, money market
comprises both organized and unorganized sectors. Unorganized sector is normally made up of

Fig(a)
indigenous money lenders and bankers who do not follow formal lines of business.

Their businesses are informal and thus independent of the Reserve Bank of India or banks for
any fund support. This sector is shrinking but, during the period of economic reforms launched
after 1991, the activities of these institutions have become a matter of serious concern and
anxiety.

The organized component of money market consists of the RBI, commercial banks and
cooperative banks. The RBI is the head of the financial institutions as well as the monetary
authority of the country. In the diagram, we have not shown anything about the RBI.

The second most important component of the organized money market is the commercial banks.
The first commercial bank in this country—Bank of Bengal—was set up in 1806 in Kolkata. In
addition to this Presidency Bank of Kolkata, two other Presidency Banks were established in
1840 in Mumbai and in 1843 in Chennai. Integrating these three commercial banks or Presidency
Banks, the Imperial Bank of India was formed in 1921.

This Imperial Bank was nationalized in 1955 and then came to be known as the State Bank of
India. Its seven subsidiary banks were nationalized in 1956. However, Indira Gandhi
nationalized 14 commercial banks—having deposits of Rs. 50 crore and above—in 1969.
Another 6 private banks were nationalized in 1980. At present, the number of public sector banks
is 27.

In terms of size and business, cooperative banks in India are rather tiny compared to commercial
banks. It is a three-tier banking structure (i) with the State Cooperative Bank operating in each
state as an apex bank, (ii) at the district level, the central cooperative hanks, and (iii) at the
village level, the primary agricultural credit societies. However, long- term loans beyond five
years are given by the Primary Cooperative Agricultural and Rural Development Banks
(PCARDBs).

Although public sector commercial banks is the dominant banking sector, privately- owned
banks are nonetheless important in the liberalised regime. Following the Narasimham Committee
recommendations made in 1991 and in 1998, private banks are now being allowed to operate. In
addition, there are some foreign banks operating in India with little or no restrictions now.

Finally, regional rural banks have been functioning since 1975 to meet the credit needs of the
rural people. At present, the number of regional banks stands at 76.

The other side of the Fig.(a)deals with ‘other financial institutions’. The main three elements of
other financial institutions are: (i) insurance sector, (ii) mutual funds, and (iii) development
banks. The two notable insurance institutions are the Life Insurance Corporation of India and the
General Insurance Corporation.

The most prominent mutual funds institution is the Unit Trust of India. Finally, as the name
suggests, development banks provide long-term capital to industries in a rather non-conventional
way. At present, there are as many as 60 development banks in the country. The largest of them
is the Industrial Development Bank of India (IDB1).

Finally, in the realm of industrial finance, there is an institution called capital market that
provides long-term funds to both public and private sector units. Security market is the most
important component of the capital market that deals in both corporate and government or gilt-
edged securities. In India, the capital market has undergone a revolutionary change in recent
years following the launching of the new economic policies in 1991.

3) What are Inventories? Explain.

Ans:- Meaning of Inventory:

Inventory is defined as a stock or store of goods. These goods are maintained on hand at or near
a business's location so that the firm may meet demand and fulfill its reason for existence. If the
firm is a retail establishment, a customer may look elsewhere to have his or her needs satisfied if
the firm does not have the required item in stock when the customer arrives. If the firm is a
manufacturer, it must maintain some inventory of raw materials and work-in-process in order to
keep the factory running. In addition, it must maintain some supply of finished goods in order to
meet demand.
Sometimes, a firm may keep larger inventory than is necessary to meet demand and keep the
factory running under current conditions of demand. If the firm exists in a volatile environment
where demand is dynamic (i.e., rises and falls quickly), an on-hand inventory could be
maintained as a buffer against unexpected changes in demand. This buffer inventory also can
serve to protect the firm if a supplier fails to deliver at the required time, or if the supplier's
quality is found to be substandard upon inspection, either of which would otherwise leave the
firm without the necessary raw materials. Other reasons for maintaining an unnecessarily large
inventory include buying to take advantage of quantity discounts (i.e., the firm saves by buying
in bulk), or ordering more in advance of an impending price increase.
Generally, inventory types can be grouped into four classifications: raw material, work-in-
process, finished goods, and MRO goods.
According to R.L. Ackoff and M.W. Sasieni, “Inventory consists of usable but idle resources.
The resources may be of any type; for example, men, materials, machines or money. When the
resources involved are materials or goods in any stage of completion, inventory is referred to as
stock. ”

In a nutshell, the term inventory may be defined as “the stock of goods, commodities or other
economic resources that are stored or reserved at any given period for future production or for
meeting future demand.

Types/Classification of Inventory:
a)RAW MATERIALS
Raw materials are inventory items that are used in the manufacturer's conversion process to
produce components, subassemblies, or finished products. These inventory items may be
commodities or extracted materials that the firm or its subsidiary has produced or extracted.
They also may be objects or elements that the firm has purchased from outside the organization.
Even if the item is partially assembled or is considered a finished good to the supplier, the
purchaser may classify it as a raw material if his or her firm had no input into its production.
Typically, raw materials are commodities such as ore, grain, minerals, petroleum, chemicals,
paper, wood, paint, steel, and food items. However, items such as nuts and bolts, ball bearings,
key stock, casters, seats, wheels, and even engines may be regarded as raw materials if they are
purchased from outside the firm.
The bill-of-materials file in a material requirements planning system (MRP) or a manufacturing
resource planning (MRP II) system utilizes a tool known as a product structure tree to clarify the
relationship among its inventory items and provide a basis for filling out, or "exploding," the
master production schedule. Consider an example of a rolling cart. This cart consists of a top that
is pressed from a sheet of steel, a frame formed from four steel bars, and a leg assembly
consisting of four legs, rolled from sheet steel, each with a caster attached. An example of this
cart's product structure tree is presented in Figure 1.

Figure 1
Generally, raw materials are used in the manufacture of components. These components are then
incorporated into the final product or become part of a subassembly. Subassemblies are then
used to manufacture or assemble the final product. A part that goes into making another part is
known as a component, while the part it goes into is known as its parent. Any item that does not
have a component is regarded as a raw material or purchased item. From the product structure
tree it is apparent that the rolling cart's raw materials are steel, bars, wheels, ball bearings, axles,
and caster frames.
b)WORK-IN-PROCESS
Work-in-process (WIP) is made up of all the materials, parts (components), assemblies, and
subassemblies that are being processed or are waiting to be processed within the system. This
generally includes all material—from raw material that has been released for initial processing
up to material that has been completely processed and is awaiting final inspection and acceptance
before inclusion in finished goods.
Any item that has a parent but is not a raw material is considered to be work-in-process. A
glance at the rolling cart product structure tree example reveals that work-in-process in this
situation consists of tops, leg assemblies, frames, legs, and casters. Actually, the leg assembly
and casters are labeled as subassemblies because the leg assembly consists of legs and casters
and the casters are assembled from wheels, ball bearings, axles, and caster frames.
c)FINISHED GOODS
A finished good is a completed part that is ready for a customer order. Therefore, finished goods
inventory is the stock of completed products. These goods have been inspected and have passed
final inspection requirements so that they can be transferred out of work-in-process and into
finished goods inventory. From this point, finished goods can be sold directly to their final user,
sold to retailers, sold to wholesalers, sent to distribution centers, or held in anticipation of a
customer order.
Any item that does not have a parent can be classified as a finished good. By looking at the
rolling cart product structure tree example one can determine that the finished good in this case is
a cart.
Inventories can be further classified according to the purpose they serve. These types include
transit inventory, buffer inventory, anticipation inventory, decoupling inventory, cycle inventory,
and MRO goods inventory. Some of these also are know by other names, such as speculative
inventory, safety inventory, and seasonal inventory. We already have briefly discussed some of
the implications of a few of these inventory types, but will now discuss each in more detail.
d)TRANSIT INVENTORY
Transit inventories result from the need to transport items or material from one location to
another, and from the fact that there is some transportation time involved in getting from one
location to another. Sometimes this is referred to as pipeline inventory. Merchandise shipped by
truck or rail can sometimes take days or even weeks to go from a regional warehouse to a retail
facility. Some large firms, such as automobile manufacturers, employ freight consolidators to
pool their transit inventories coming from various locations into one shipping source in order to
take advantage of economies of scale. Of course, this can greatly increase the transit time for
these inventories, hence an increase in the size of the inventory in transit.
e)BUFFER INVENTORY
Inventory is sometimes used to protect against the uncertainties of supply and demand, as well as
unpredictable events such as poor delivery reliability or poor quality of a supplier's products.
These inventory cushions are often referred to as safety stock. Safety stock or buffer inventory is
any amount held on hand that is over and above that currently needed to meet demand.
Generally, the higher the level of buffer inventory, the better the firm's customer service. This
occurs because the firm suffers fewer "stock-outs" (when a customer's order cannot be
immediately filled from existing inventory) and has less need to backorder the item, make the
customer wait until the next order cycle, or even worse, cause the customer to leave empty-
handed to find another supplier. Obviously, the better the customer service the greater the
likelihood of customer satisfaction.
f)ANTICIPATION INVENTORY
Oftentimes, firms will purchase and hold inventory that is in excess of their current need in
anticipation of a possible future event. Such events may include a price increase, a seasonal
increase in demand, or even an impending labor strike. This tactic is commonly used by retailers,
who routinely build up inventory months before the demand for their products will be unusually
high (i.e., at Halloween, Christmas, or the back-to-school season). For manufacturers,
anticipation inventory allows them to build up inventory when demand is low (also keeping
workers busy during slack times) so that when demand picks up the increased inventory will be
slowly depleted and the firm does not have to react by increasing production time (along with the
subsequent increase in hiring, training, and other associated labor costs). Therefore, the firm has
avoided both excessive overtime due to increased demand and hiring costs due to increased
demand. It also has avoided layoff costs associated with production cut-backs, or worse, the
idling or shutting down of facilities. This process is sometimes called "smoothing" because it
smoothes the peaks and valleys in demand, allowing the firm to maintain a constant level of
output and a stable workforce.
g)DECOUPLING INVENTORY
Very rarely, if ever, will one see a production facility where every machine in the process
produces at exactly the same rate. In fact, one machine may process parts several times faster
than the machines in front of or behind it. Yet, if one walks through the plant it may seem that all
machines are running smoothly at the same time. It also could be possible that while passing
through the plant, one notices several machines are under repair or are undergoing some form of
preventive maintenance. Even so, this does not seem to interrupt the flow of work-in-process
through the system. The reason for this is the existence of an inventory of parts between
machines, a decoupling inventory that serves as a shock absorber, cushioning the system against
production irregularities. As such it "decouples" or disengages the plant's dependence upon
the sequential requirements of the system (i.e., one machine feeds parts to the next machine).
The more inventory a firm carries as a decoupling inventory between the various stages in its
manufacturing system (or even distribution system), the less coordination is needed to keep the
system running smoothly. Naturally, logic would dictate that an infinite amount of decoupling
inventory would not keep the system running in peak form. A balance can be reached that will
allow the plant to run relatively smoothly without maintaining an absurd level of inventory. The
cost of efficiency must be weighed against the cost of carrying excess inventory so that there is
an optimum balance between inventory level and coordination within the system.
h)CYCLE INVENTORY
Those who are familiar with the concept of economic order quantity (EOQ) know that the EOQ
is an attempt to balance inventory holding or carrying costs with the costs incurred from ordering
or setting up machinery. When large quantities are ordered or produced, inventory holding costs
are increased, but ordering/setup costs decrease. Conversely, when lot sizes decrease, inventory
holding/carrying costs decrease, but the cost of ordering/setup increases since more orders/setups
are required to meet demand. When the two costs are equal (holding/carrying costs and
ordering/setup costs) the total cost (the sum of the two costs) is minimized. Cycle inventories,
sometimes called lot-size inventories, result from this process. Usually, excess material is
ordered and, consequently, held in inventory in an effort to reach this minimization point. Hence,
cycle inventory results from ordering in batches or lot sizes rather than ordering material strictly
as needed
i)MRO GOODS INVENTORY
Maintenance, repair, and operating supplies, or MRO goods, are items that are used to support
and maintain the production process and its infrastructure. These goods are usually consumed as
a result of the production process but are not directly a part of the finished product. Examples of
MRO goods include oils, lubricants, coolants, janitorial supplies, uniforms, gloves, packing
material, tools, nuts, bolts, screws, shim stock, and key stock. Even office supplies such as
staples, pens and pencils, copier paper, and toner are considered part of MRO goods inventory.
j)THEORETICAL INVENTORY
In their book “Managing Business Process Flows: Principles of Operations
Management”, Anupindi, Chopra, Deshmukh, Van Mieghem, and Zemel discuss a final
type of inventory known as theoretical inventory. They describe theoretical inventory as the
average inventory for a given throughput assuming that no WIP item had to wait in a buffer. This
would obviously be an ideal situation where inflow, processing, and outflow rates were all equal
at any point in time. Unless one has a single process system, there always will be some inventory
within the system. Theoretical inventory is a measure of this inventory (i.e., it represents the
minimum inventory needed for goods to flow through the system without waiting). The authors
formally define it as the minimum amount of inventory necessary to maintain a process
throughput of R, expressed as:
Theoretical Inventory = Throughput × Theoretical Flow Time
I th = R × T th
In this equation, theoretical flow time equals the sum of all activity times (not wait time)
required to process one unit. Therefore, WIP will equal theoretical inventory whenever actual
process flow time equals theoretical flow time.
Inventory exists in various categories as a result of its position in the production process (raw
material, work-in-process, and finished goods) and according to the function it serves within the
system (transit inventory, buffer inventory, anticipation inventory, decoupling inventory, cycle
inventory, and MRO goods inventory). As such, the purpose of each seems to be that of
maintaining a high level of customer service or part of an attempt to minimize overall costs.
4) Explain debentures as instruments for raising long-term debt capital.

Ans:-Debt capital is funds supplied by lender that is part of a company’s capital structure. Debt
capital usually refers to long-term capital, specifically bonds, rather than short-term loans to be
paid off within one year.
Debt capital differs from equity or share capital because subscribers to debt capital do not
become part owners of the business, but are merely creditors, and the suppliers of debt capital
usually receive a contractually fixed annual percentage return on their loan, and this is known as
the coupon rate. Debt refers to capital that is loaned by a lender to a borrower, who is in turn
obligated (1) to repay the original amount loaned–or the principal–within a specified time period,
and (2) to pay interest on the principal.
Debt capital ranks higher than equity capital for the repayment of annual returns. This means that
legally, the interest on debt capital must be repaid in full before any dividends are paid to any
suppliers of equity.
The main source of debt capital for Indian corporate expansion has traditionally been the strong
domestic bank loan market. The existence of a vibrant debt capital market is important from a
macro-economic perspective to provide mechanisms for greater sources of financing and
liquidity and for risk minimization in any economy. In India, while equity capital markets have
developed significantly in terms of liquidity, infrastructure and regulatory framework, the debt
capital markets have traditionally lagged behind.
The various instruments of debt can be classified into long term, medium term and short term
debt depending on the tenure for which the amount has been raised or the period of repayment.
Apart from term loan and credit facilities, the various instruments of debt are mentioned below.
(i) Bonds
(ii) Debenture
(iii) Equipment Financing
(iv) Deposit (including Public Deposit)
(v) Commercial Paper
(vi) Inter-corporate Debt
Mezzanine Debt is a different type of debt that typically has both debt and equity characteristics.
Mezzanine Debt carries a higher interest rate and some form of equity options (an equity interest
in the company‐ typically in the form of stock or warrants) to drive acceptable risk‐adjusted
returns.
In this article we would be discussing the legal framework for issue of Debenture specifically
and debt instrument in general.

Debenture
Debentures – meaning and characteristics
The Companies Act, 1956 (“Companies Act”) defines ‘debenture’ as follows:
“debenture” includes debenture stock, bonds and any other securities of a company, whether
constituting a charge on the assets of the company or not;
In modern commercial usage, a debenture denotes an instrument issued by the company,
normally but not necessarily, called on the face of it a debenture, and providing for the payment
of, or acknowledging the indebtedness in a specified sum, at a fixed rate, with interest thereon. It
usually, but not necessarily, gives a charge by way of security, and is often, though not
invariably, expressed to be one of a series of like debentures. But the term as used in the modern
commercial parlance is of extremely elastic character. Following are the basic characteristics of
debentures.
(i) It is a document containing an acknowledgement of indebtedness.
(ii) Debentures are issued in form of certificates.
(iii) Debenture may be secured or unsecured. Debentures need not necessarily create a charge on
the company’s assets. Section 2(12) provides that debenture may or may not constitute a charge
on the assets of the company.
(iv) Debentures are generally issued under the common seal of the company.
(v) Debenture holders do not have any right to vote at any meeting of the company. In terms of
provisions of section 117 of the Act, no company shall, after the commencement of this Act,
issue any debentures carrying voting rights at any meeting of the company, whether generally or
in respect of particular classes of business.
(vi) Debentures may be convertible or non-convertible.
(vii) Debentures may or may not be one of a series.
(viii) Debentures carry interest at a fixed rate.
Classification of Debenture
Debentures are classified into various types. These are redeemable, irredeemable, perpetual,
convertible, non convertible, fully, partly, secured, mortgage, unsecured, naked, first mortgaged,
second mortgaged, bearer, fixed, floating rate, coupon rate, zero coupon, secured premium notes,
callable, puttable, etc.
Debentures are classified into different types based on their tenure, redemption, mode of
redemption, convertibility, security, transferability, type of interest rate, coupon rate, etc.
Following are the various types of debentures vis-a-vis their basis of classification.
Redemption / Tenure
Redeemable and Irredeemable (Perpetual) Debentures: Redeemable debentures carry a specific
date of redemption on the certificate. The company is legally bound to repay the principal
amount to the debenture holders on that date. On the other hand, irredeemable debentures, also
known as perpetual debentures, do not carry any date of redemption. This means that there is no
specific time of redemption of these debentures. They are redeemed either on the liquidation of
the company or when the company chooses to pay them off to reduce their liability by issues a
due notice to the debenture holders beforehand.
Convertibility
Convertible and Non Convertible Debentures: Convertible debenture holders have an
option of converting their holdings into equity shares. The rate of conversion and the period after
which the conversion will take effect are declared in the terms and conditions of the agreement
of debentures at the time of issue. On the contrary, non convertible debentures are simple
debentures with no such option of getting converted into equity. Their state will always remain
of a debt and will not become equity at any point of time.
Fully and Partly Convertible Debentures: Convertible Debentures are further
classified into two – Fully and Partly Convertible. Fully convertible debentures are completely
converted into equity whereas the partly convertible debentures have two parts. Convertible part
is converted into equity as per agreed rate of exchange based on agreement. Non convertible part
becomes as good as redeemable debenture which is repaid after the expiry of the agreed period.

Security
Secured (Mortgage) and Unsecured (Naked) Debentures: Debentures are secured in two ways.
One when the debenture is secured by charge on some asset or set of assets which is known as
secured or mortgage debenture and another when it is issued solely on the credibility of the
issuer is known as naked or unsecured debenture. A trustee is appointed for holding the secured
asset which is quite obvious as the title cannot be assigned to each and every debenture holder.
First Mortgaged and Second Mortgaged Debentures: Secured / Mortgaged
debentures are further classified into two types – first and second mortgaged debentures. There is
no restriction on issuing different types of debentures provided there is clarity on claims of those
debenture holders on the profits and assets of the company at the time of liquidation. First
mortgaged debentures have the first charge over the assets of the company whereas the second
mortgage has the secondary charge which means the realization from the assets will first fulfill
obligation of first mortgage debentures and then will do for second ones.
Transferability / Registration
Registered Unregistered Debentures (Bearer) Debenture: In the case of registered debentures, the
name, address, and other holding details are registered with the issuing company and whenever
such debenture is transferred by the holder; it has to be informed to the issuing company for
updating in its records. Otherwise the interest and principal will go the previous holder because
company will pay to the one who is registered. Whereas, the unregistered commonly known as
bearer debenture. can be transferred by mere delivery to the new holder. They are considered as
good as currency notes due to their easy transferability. The interest and principal is paid to the
person who produces the coupons, which are attached to the debenture certificate. and the
certificate respectively.
Type of Interest Rates

Fixed and Floating Rate Debentures: Fixed rate debentures have fixed interest rate over
the life of the debentures. Contrarily, the floating rate debentures have floating rate of interest
which is dependent on some benchmark rate say LIBOR etc.

No Coupon Rate

Zero Coupon and Specific Rate Debentures: Zero coupon debentures do not carry
any coupon rate or we can say that there is zero coupon rate. The debenture holder
will not get any interest on these types of debentures. Need not to get surprised, for
compensating against no interest, companies issue them at a discounted price which
is very less compared to the face value of it. The implicit interest or benefit is the
difference between the issue price and the face value of that debenture. These are
also known as ‘Deep Discount Bonds’ .All other debentures with specified rate of
interest are specific rate debentures which are just like a normal debenture.

Secured Premium Notes / Debentures: These are secured debentures which are
redeemed at a premium over the face value of the debentures. They are similar to zero coupon
bonds. The only difference is that the discount and premium. Zero coupon bonds are issued at
discount and redeemed at par whereas the secured premium notes are issued at par and redeemed
at premium.

From the investor's point of view, in general, debt securities offer stable returns. Further, if the
company is liquidated then debenture holders are paid before preferred stockholders and
common stockholders. Bondholders are creditors, However, they do not participate in any
increased earnings the firm may experience. Similarly, they do not get right to vote.

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