State three features of a debenture as a source of finance
Debentures are a source of finance for a company, much like equity or debt. They are issued by a company to debenture holders who can be individuals or companies, raising funds for the firm and giving investors interest payments for their investments. The three features of a debenture are:
- It has fixed interest payments – investors who purchase debentures often get fixed interest payments, given at regular intervals regardless of the financial performance of the company.
- Can be either secured or unsecured – debentures can be secured or unsecured. Usually, secured debentures are backed by assets of the company and gives security to investors in case they default in payment. On the other hand, unsecured debentures lack the backing of specific assets, hence carry significant risks.
- Can be either redeemable or irredeemable – being redeemable means that a debenture has a fixed maturity date, when the principal amount is paid to debenture holders. Irredeemable debentures are those that do not have a maturity date.
This question was taken from KNEC past papers of 2015. Also consider the features, advantages and disadvantages of other sources of finance such as debt, equity, venture capital, bonds, etc. KNEC past papers questions and answers help college students taking diploma to study online and prepare for exams.
