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Business Mathematics and Statistics · Ch 7 — Financial Mathematics (Annuities; Stocks, Shares, Debentures and Brokerage)

Debentures and Brokerage

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Debentures and Brokerage

A debenture is a certificate of loan issued by a company to raise borrowed (not owned) capital — a debenture-holder is a creditor of the company, not a part-owner as a shareholder is, and is entitled to a fixed rate of interest (not a variable dividend), payable whether or not the company earns a profit that year, and is repaid ahead of any shareholder if the company is wound up.

Note

Annual Interest from a Debenture Holding

Annual Interest=Number of Debentures×Face Value×Rate of Interest100\text{Annual Interest} = \text{Number of Debentures} \times \text{Face Value} \times \dfrac{\text{Rate of Interest}}{100}

This mirrors the dividend-income formula of the previous section exactly, with 'interest' in place of 'dividend' — again always calculated on face value, never market value.

Brokerage is the commission a stockbroker charges an investor for buying or selling shares/debentures on their behalf, usually quoted as a small percentage of the market (transaction) value, or as a fixed rupee amount per share/debenture. Brokerage is always added to the market price when buying (raising the investor's real cost) and subtracted from the market price when selling (lowering the investor's real proceeds) — brokerage is a genuine transaction cost either way, never a benefit to the investor.

Note

Effective Buying and Selling Price

Effective Buying Price=Market Price+Brokerage\text{Effective Buying Price} = \text{Market Price} + \text{Brokerage}

Effective Selling Price=Market Price−Brokerage\text{Effective Selling Price} = \text{Market Price} - \text{Brokerage} …

Definition 9Debenture

A certificate of loan (borrowed capital) issued by a company; a debenture-holder is a creditor entitled to a fixed rate of interest on fa …

Definition 10Brokerage

The commission charged by a stockbroker for buying or selling shares/debentures, usually a percentage of market value; added to the price when buyin …