Unmasking the Mystery of Debenture Stock

What is Debenture Stock?

Debenture stock is a type of loan that a big company or a government takes from the public by issuing debentures. A debenture is a document that promises to pay back the money with interest after a certain period of time.

Debenture stock is different from debenture, because it does not have a fixed maturity date. Instead, it pays interest or dividend payments to the people who lend money, until the company or the government decides to redeem or repay the loan. The people who buy the debenture stock are called debenture stockholders or shareholders.

Debenture stock is also different from ordinary shares or common stock, because it has a fixed rate of interest or dividend, and it has a prior claim over the assets and profits of the company or the government. This means that debenture stockholders get paid before ordinary shareholders, in case of bankruptcy or liquidation.

Why Do Companies or Governments Issue Debenture Stock?

Companies or governments issue debenture stock for various reasons, such as:

• To raise money for long-term projects or investments. For example, a company might issue debenture stock to build a new factory, buy new equipment, or expand its business. A government might issue debenture stock to build roads, bridges, schools, or hospitals.
• To take advantage of low interest rates. Interest rates are the extra money that you pay or receive when you borrow or lend money. When interest rates are low, it is cheaper to borrow money than to use your own money. For example, if a company can borrow money at 5% interest, but it can earn 10% profit by using the money, it makes sense to issue debenture stock and borrow money.
• To diversify their sources of funds. Diversify means to have different options or choices. Companies or governments might not want to depend on only one source of funds, such as banks, shareholders, or taxes. They might want to have more options or choices, such as debenture stock, bonds, or grants. This way, they can reduce their risk and increase their flexibility.

How Does Debenture Stock Work?

Debenture stock works as follows:

1. The company or the government that wants to borrow money decides how much money it needs, how much interest or dividend it wants to pay, and how it wants to redeem or repay the loan. It also decides who can buy the debenture stock, such as the public, institutions, or foreign investors. It then prepares a contract that specifies all these details, such as the coupon rate, the redemption terms, and the conditions. This contract is called an indenture.
2. The company or the government then sells the debenture stock to the people who want to lend money. The people who buy the debenture stock are called debenture stockholders or shareholders. They pay the face value or the principal amount of the debenture stock to the company or the government. The face value is the amount of money that the company or the government promises to pay back when it redeems or repays the loan.
3. The company or the government then pays interest or dividend payments to the debenture stockholders at regular intervals, such as every six months or every year. The interest or dividend rate is the percentage of the face value that the company or government pays as interest or dividend. For example, if the face value of a debenture stock is $1,000 and the coupon rate is 6%, the company or the government pays $60 as interest or dividend every year.
4. The company or the government then redeems or repays the face value or the principal amount of the debenture stock to the debenture stockholders when it decides to do so. The company or the government can redeem or repay the debenture stock in different ways, such as:
   1. At par, which means at the same price as the face value. For example, if the face value of a debenture stock is $1,000, the company or the government pays $1,000 to the debenture stockholder when it redeems or repays the loan.
   2. At a premium, which means at a higher price than the face value. For example, if the face value of a debenture stock is $1,000, and the premium is 10%, the company or the government pays $1,100 to the debenture stockholder when it redeems or repays the loan.
   3. At a discount, which means at a lower price than the face value. For example, if the face value of a debenture stock is $1,000, and the discount is 10%, the company or the government pays $900 to the debenture stockholder when it redeems or repays the loan.

Examples of Debenture Stock

Some examples of debenture stock are:

• Corporate debenture stock: This is debenture stock issued by companies to raise money for their business activities. For example, Amazon.com Inc. issued $16 billion worth of debenture stock in June 2017 to fund its acquisition of Whole Foods Market Inc.
• Government debenture stock: This is debenture stock issued by governments to raise money for their public spending or debt repayment. For example, the UK government issued £2.5 billion worth of debenture stock in March 2019 to refinance its existing debt.
• Convertible debenture stock: This is debenture stock that can be converted into shares or stocks of the issuing company at a certain price or ratio. For example, Netflix Inc. issued $2 billion worth of convertible debenture stock in October 2018, which could be converted into Netflix shares at a price of $330.58 per share.

Debenture Stock in Accounting

Debenture stock in accounting is recorded as a liability or a debt of the issuing company or government. It is classified as a long-term liability, because it does not have a fixed maturity date. It is also classified as a non-current liability, because it is not expected to be paid within one year.

The accounting treatment of debenture stock depends on the type and the features of the debenture stock. Generally, the following rules apply:

• For non-convertible debenture stock, the issuing company or government records the face value of the debenture stock as a liability in the balance sheet, and records the interest or dividend payments as an expense in the income statement. The debenture stockholders record the face value of the debenture stock as an asset in the balance sheet, and record the interest or dividend payments as an income in the income statement.
• For convertible debenture stock, the issuing company or government records the face value of the debenture stock as a liability in the balance sheet, and records the interest or dividend payments as an expense in the income statement. However, if the debenture stock is converted into shares or stocks, the issuing company or government reduces the liability by the face value of the debenture stock, and increases the equity by the same amount. The debenture stockholders record the face value of the debenture stock as an asset in the balance sheet, and record the interest or dividend payments as an income in the income statement. However, if the debenture stock is converted into shares or stocks, the debenture stockholders reduce the asset by the face value of the debenture stock, and increase the investment by the same amount.

Summary of Debenture Stock

Here is a list of bullet points that summarize the main points of the term debenture stock:

• Debenture stock is a type of loan that a big company or a government takes from the public by issuing debentures without a fixed maturity date
• Debenture stock pays interest or dividend payments to the people who lend money, and pays back the face value or the principal amount when the company or the government decides to redeem or repay the loan
• Debenture stock can be issued by companies or governments, and can be convertible or non-convertible
• Debenture stock is recorded as a liability or a debt in the accounting books of the issuing company or government, and as an asset or an investment in the accounting books of the debenture stockholders