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Accountancy · Ch 6 — Issue and Redemption of Debentures

Terms Introduced in the Chapter

Terms Introduced in the Chapter

The key terms introduced in this chapter, with a short meanin …

DefinitionDebenture

A written acknowledgement of a debt issued by a company, usually carrying a fixed rate of interest and a promise to repay the principal. It forms part of a company's loan (borrowed) capital, and its …

DefinitionBond

An instrument of debt similar to a debenture in content and texture. The main difference is that a bond may be issued without a pre-determined rate of interest, as in th …

DefinitionMortgaged Debenture

A secured debenture that carries a charge on the company's assets as security for repayment. If the company defaults, the holders can realise their du …

DefinitionPerpetual Debenture

A debenture that is not repayable during the lifetime of the company and is redeemed only at the time of winding up. It is also called a …

DefinitionZero Coupon Rate Debenture

A debenture issued without a stated rate of interest. It is issued at a large discount to its face value, and that discount is the investor's return in …

DefinitionSpecific Coupon Rate Debenture

A debenture issued with a stated fixed rate of interest (the coupon rate), which the company pays to the holders …

DefinitionRegistered Debenture

A debenture whose holder's name and holdings are recorded in the company's register of debenture holders. It can be transferred only through …

DefinitionBearer Debenture

A debenture that is transferable by mere delivery. The company keeps no record of the holder, and interest is paid to whoever holds the …

DefinitionCharge

An encumbrance created on the company's assets as security for its debentures, obliging the company to meet its debenture obligations from those assets. It may be a fixe …

DefinitionFixed Charge

A charge created against a specific, identifiable asset such as land or building, which the company cannot dispose of freely whi …

DefinitionFloating Charge

A charge on a class of the company's assets that keeps changing, such as stock-in-trade or debtors. It settles (crystallises) into a fixed charge on a specified event …

DefinitionFirst Charge

A charge that gives its holder priority in repayment; the first-charge holder realises the claim from the net value of the charged asset befor …

DefinitionMaturity Date

The date on which the debentures fall due for redemption and the company repays the principal amount to the …

DefinitionPrincipal

The face (nominal) value of the debentures — the sum the company borrows and undertakes to repay to the hol …

DefinitionDiscount/Loss on Issue of Debenture

The shortfall of the issue price below face value (discount on issue) together with any premium payable on redemption (loss on issue). It is a capital loss, written off o …

DefinitionPurchase Consideration

The amount payable by a company for assets or a business acquired from a vendor, which the company may discharge by issuing debentures …

DefinitionRedemption of Debenture

The discharge of the liability on debentures by repaying the debenture holders, normally on the expiry of the term for which the …

DefinitionDraw of Lots

A random method of selecting which specific debentures are to be redeemed when redemption is made in instalments, so that the selection …

DefinitionOwn Debentures

A company's own debentures that it has purchased from the open market and holds temporarily in an Own Debentures Account before cance …

DefinitionRedemption out of Capital

Redemption of debentures where the amounts repaid are not set aside out of divisible profits, so the company's capital is reduced to that extent (no adequate Debenture R …

DefinitionRedemption out of Profits

Redemption of debentures where an amount is transferred from divisible profits to the Debenture Redemption Reserve, so that reserves — not capital — b …

DefinitionRedemption of Convertible Debenture

Redemption in which debentures are discharged by converting them into equity shares, preference shares or new debentures, instead of by a cas …

DefinitionDebentures Sinking Fund

A fund built up by setting aside a fixed sum out of profits each year and investing it, so that enough money is available to redeem the deb …

DefinitionCollateral Security

A secondary or additional security given to a lender over and above the primary security. Debentures issued as collateral are enforced only if the compan …

DefinitionSecond Charge

A charge that ranks after the first charge; its holder can realise the loan only from the surplus value of the asset that remains after the first …

DefinitionPurchase of Debenture from Open Market

A method of redemption in which a company buys back its own debentures from the open market and cancels them, often below face value, transferring the resulti …