What are debentures?

What are debentures?

A good investor should know the market and all the investment options available. So if you are thinking of investing your money and still do not know what debentures are, this article is for you.

Debentures are one of the oldest ways to raise funds through the issuance of securities. In fact, in the United Kingdom, bonds with the characteristics of debentures were already issued more than 500 years ago. You’ve never heard of it, but were you curious? Let us then analyze!

The origin

The word debentures comes from Old English, and means something like “debt,” or “to be paid.” Debentures are securities issued by companies, such as corporations, with the purpose of raising funds for various purposes. The companies, after deciding to issue debentures, offer the securities to the investors, for a certain price.

These securities entitle the investor to acquire credit rights against the institution issuing the debentures. That is, the investor becomes a creditor of the institution, receiving the periodic interest of the investment and the principal payment. Usually, an expiration date for these securities is stipulated. While the deadline does not arrive, the investor receives interest from the association that issued the debentures.

Thus, at the end of the term, investor is entitled to receive the amount invested, plus monetary correction and interest.

Summarizing what debentures is

If we summarize in a few words what is debentures, we can say that it is like a loan that the investor makes to an association or company, becoming a creditor of it and starting to receive interest. Yields can be pre or post-fixed, and there is the option of converting them into stocks.

Profitability of debentures

The profitability of the debentures can occur in three ways: pre-fixed, post-fixed or hybrid. In the first case, a predetermined percentage interest rate is stipulated in the deed. In this way, it is possible to calculate in advance the value of the yields at the maturity date of the securities.

In the case of post-fixed debentures, the remuneration is given through a rate, such as the Basic Interest Rate, the Reference Rate, the Long-Term Interest Rate or the Basic Financial Rate. Who will choose the rate in this modality, is the company that issued the debenture.

The profitability of the hybrid type debentures involves a fixed rate plus a variable index. Often, the Extended Consumer Price Index is used, which is a measure of inflation in the country.

Advantages of debentures

Transactions involving debentures bring advantages both to the institution issuing the securities and to the investor who acquires them. For the issuing association, which wants to raise funds for some purpose, it may be more advantageous to put debenture bonds on sale than to borrow from a bank. Transactions can take place very fast as if we borrow in the format of car title loans.

In addition, the interest paid by it may be deducted from the Income Tax as financial expenses.

On the investor side, there are two main advantages:

The first refers to the existence of both pre-fixed and post-fixed debentures, at the choice of the investor, making it possible to diversify the investments. By acquiring fixed-rate securities, he can, at the time of hiring, know the earnings that will be obtained in the future.

The second advantage is the good yield of the debentures, which, in comparison with the most common fixed-income securities, is usually higher. But high risk.