Ways to Redeem Debentures

Debenture can be redeemed in various ways by a company. It can pay a lump sum on the date of maturity or may pay in annual installments. A company can also purchase it from the open market or convert to an equity share in case of convertible debentures. Innovative ways like call or put option can also be utilized. The company may exercise a call option or the investor may utilize put option for redemption.

Redeeming a debenture means paying back the principal amount to the debenture holder. To speak in company’s language, discharge off the debt liability of debentures. Debenture redemption generates a set of questions in mind with specifications like an amount of money to be required, sources from where to manage the fund, etc. A company is also relieved of  a big liability after this and decrease its leverage ratios.

Redemption of Debenture

Ways to Redeem Debentures – Lump Sum Payment, Installments, Open Market Purchase, Conversion to Shares, Call Option and Put OptionThere are various ways of redeeming a debenture which is discussed

Lump Sum Payment on a Fixed Date

This is the simplest option of redeeming the debentures. The debenture holders are paid their promised sum on the fixed date.

The lump sum is the total amount of principal of all the debentures if they are not redeemed at premium or discount. The fixed date is nothing but the maturity date mentioned on the agreement of debenture. The company may choose to pay the debentures before maturity also which is at the option of the company. The amount of payment and the date is known to the company in advance and therefore, they can manage the resources accordingly.

Payment in Annual Installment

This kind of redemption is similar to the redemption of a term loan. A term loan is normally redeemed in monthly, quarterly, biannual, or annual installments. In this method, the company pays some part of the principal every year to the debenture holders till the time of maturity. The total principal is divided by a number of years for which they are borrowed which becomes the installment to be paid at the end of every year.

Debenture Redemption Reserve / Sinking Fund

Debenture redemption reserve is a very well known term in the reference of debentures. This reserve is built by transferring some part of the profits in this reserve every year. It is always easy to arrange smaller fund every year than arranging a lot of funds at a particular point of time for payment to debenture holders. In many countries, a law has made it compulsory to maintain a debenture redemption reserve or a sinking fund. The primary objective is to protect an interest of the debenture holders.

Buy from Open Market

If the debentures are traded on a regulated exchange, the company can opt to purchase them from the open market. It will reduce a lot of administrative, paperwork and efforts of manpower.

Conversion into Shares

There is a type of debentures called convertible debentures which contain a clause of conversion into ordinary equity shares of the company. As per the agreed terms and time period, the convertible debenture is converted into ordinary equity share and at that point of conversion, the liability of debenture is discharged.

Call and Put Option

A company may issue debenture with the call option or put option for the redemption purpose. A call option is exercised by the company whereby it can opt to purchase the debentures on or before the date of maturity at a price which is arrived at according to the terms and conditions mentioned at the time of issue. Similarly, a put option is exercised by the debenture holder whereby he has the right to sell the debenture to the company at some agreed price on or before the maturity date. It is an innovative way redeeming the debentures. A call option gives the company a freedom to get away from the burden at the time it wished to do so and vice versa is the case of investors.

Last updated on : March 10th, 2018
What’s your view on this? Share it in comments below.

One Response

  1. prashant yadav

Leave a Reply

Triple Net Lease
  • Types of Invoice/Receivable Factoring
    Types of Invoice / Receivable Factoring
  • Equity Share and its Types
    Equity Share and its Types
  • Lease Finance vs Term Loan
    Lease Finance vs. Term Loan
  • Mortgage Debentures
    Mortgaged Debentures
  • Subscribe to Blog via Email

    Enter your email address to subscribe to this blog and receive notifications of new posts by email.

    Recent Posts

    Find us on Facebook

    Related pages

    ebit ebtdebenture examplehigh liquidity ratiowhats a fixed costdefine noitypes of bond covenantswhat is debit and credit in hindiaccounting basics debits and creditsoverdraft in accountingprofit maximization disadvantagesformula for calculating cost of equitydirectpay indiadefinition of rationing in economicscheque discounting businessprofitability index calculator financialdifference between mortgage and debentureecb funding in indiaoperating profits formulaline item budgeting definitionsynopsis of working capital managementadvantage and disadvantage of payback period methoddifference between stockholders and stakeholderscashflow advantagecalculate yield to maturity bondaccounts payable accounting coachirr conceptcompetitive benchmarking definitionmerits of profit maximizationebit and operating incomeshort term solvency analysisdebt covenant definitionmeaning of subscribed capitalaverage accounts receivable collection periodidbi loan statementnpat formulawhat is debited meansclosing stock meaningcost of redeemable debtdefine tangible assetcash accruals formulaadvising bank definitionmodigliani and miller 1961wcr working capitalequation for irrpayback ratiodifference between leasing and financingproject wacctypes of factoring servicesreceivables turnover ratio formulabank overdraft accounting definitionmeaning of irredeemablehow to solve for irrtwo stage dividend discount modelearnings per share formula accountingcompany debenture definitiondefine mergers and acquisitionscalculation of inventory turnoveradvantages and disadvantages of bank creditdefine debit creditdefinition of bookeepingventure capital financing definitionmm hypothesis capital structure theorycompute payback perioddifference between bills receivable and accounts receivablecalculate the payback perioddiscount rate dcfoperating cycle accounting formulameaning of debenturequick liquidity ratiotie ratio formulaaccount receivable ratio