Introduction
Debentures refers to a long-term debt instrument issued by a firm to raise capital. It is a form of loan taken by the government or company from investors (debenture holders). Investors get fixed interest over a specific period and principal back after maturity period. Investors are known as the creditors of the company.
Importance Of Debentures
Significance or importance of debentures can be highlighted as follows:
1. Source Of Finance
Debenture is a most suitable form of long term source of financing.
2. Less Costly
Debenture is less costly source of financing for the company. Cost of debenture is lower than the cost of equity.
3. Less Tax Burden
Debenture helps to minimize the tax burden of the firm because amount of interest is deducted from the income.
Earning per share can be maximized because of the benefit of financial leverage.
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5. Mobilization Of Fund
It helps to mobilize public savings and funds in the form of investment.
6. Minimum Risk
Investing in debentures involves less risk than other options of investment.
Key Benefits Of Debenture In Short
* It helps the company to raise funds that can be used in business expansion and infrastructure development.
* It is less riskier than equity financing
* It allows companies to raise fund without diluting the ownership
* It provides tax benefits as interests are tax deductible
* It generates fixed and stable income for investors
* It helps to improve credit rating of the company
