A non-convertible debenture (NCD) is a debt instrument that is issued by a company to raise funds from investors. Unlike convertible debentures, NCDs cannot be converted into equity shares of the issuing company. NCDs are usually long-term instruments with a maturity period ranging from one year to ten years, and they offer a fixed interest rate.
Investors who purchase NCDs receive interest payments periodically, usually on a quarterly or half-yearly basis. At the end of the maturity period, the investor receives the principal amount invested in the debenture. NCDs are usually rated by credit rating agencies based on the issuer's creditworthiness, and the interest rate offered on NCDs depends on the credit rating of the issuer.
NCDs are considered to be a safe investment option as they offer a fixed return and are backed by the issuer's assets. However, they are not as liquid as other forms of investments, such as stocks or mutual funds, and cannot be traded on the stock exchanges.
Type of non convertable debenture:
There are different types of non-convertible debentures (NCDs) available in the market, and some of them are:
Secured NCDs:
These NCDs are backed by a collateral or security, such as land, building, or machinery, which provides an additional level of safety to investors.
Unsecured NCDs:
Unlike secured NCDs, unsecured NCDs do not have any collateral or security backing them. They are considered to be riskier than secured NCDs but offer a higher rate of interest.
Callable NCDs:
Callable NCDs have a provision that allows the issuer to redeem or call back the debenture before its maturity period. This gives the issuer flexibility to manage its debt and interest payments.
Non-Callable NCDs:
Non-Callable NCDs do not have a provision for early redemption and cannot be called back by the issuer before maturity. This makes them less flexible for the issuer, but they offer greater stability to the investor.
Convertible NCDs:
While NCDs are generally non-convertible, there are some NCDs that come with an option to convert them into equity shares of the issuing company. These are known as convertible NCDs and offer investors the potential for capital appreciation in addition to fixed interest payments.
Investors can choose the type of NCD that suits their investment objectives and risk appetite. It is important to carefully evaluate the creditworthiness of the issuer, the terms and conditions of the NCD, and the interest rate being offered before investing in NCDs.
benefits of Non-Convertible Debentures (NCDs):
Fixed interest rate: NCDs offer a fixed interest rate, which makes them a stable investment option for investors who prefer a predictable income stream.
Safety:
NCDs are generally considered to be a safe investment option, as they are backed by the issuer's assets and offer a fixed rate of return. The creditworthiness of the issuer is an important consideration when investing in NCDs.
Diversification:
Investing in NCDs can help diversify an investor's portfolio, as they provide an alternative to other fixed-income investments such as bank fixed deposits or bonds.
Long-term investment:
NCDs are usually long-term investments, with a maturity period ranging from one year to ten years, providing a stable and predictable income stream for the investor.
Regular income:
NCDs pay interest to investors periodically, usually on a quarterly or half-yearly basis, providing a regular income stream.
Tax benefits:
NCDs offer tax benefits to investors, as the interest earned on NCDs is taxed at the investor's marginal tax rate, which may be lower than the tax rate for other investments such as fixed deposits.
NCDs are a low-risk investment option that can provide a regular income stream to investors looking for stable returns. However, it is important to carefully evaluate the creditworthiness of the issuer, the terms and conditions of the NCD, and the interest rate being offered before investing in NCDs.
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