1. Chapter 3
Debenture Issue

2. 3.1
Debentures Defined

3. What are debentures? Debentures are a fixed interest debt.
They are issued with a fixed or floating charge over specific assets of the company.

4. What are charges? Fixed charge: a specific asset (s).
Floating charge: a class of assets (eg. Accounts Receivable).

5. The Prospectus Is the disclosure document.
Registered and issued with ASIC approval.
Has an expiry date, after which a new prospectus must be registered.

6. Who commonly issues debentures?
Banks
Large companies
Finance companies
Government business enterprises

7. Features of Debentures
Term usually 2 – 10 years.
Interest – fixed or variable. Paid semi-annually in arrears.
Issue by tender or prospectus.
Traded through stockbrokers.

8. Features of the Debenture Market
Recent high profile crashes have resulted in tighter ASIC regulation.
Recent economic turmoil has meant reduced interest in the debenture market, which is considered relatively high-risk.

9. Mortgage Debentures Must not exceed 60% of the value of the property.
Lower interest paid due to lower risk.

10. Unsecured Notes Similar to a debenture. However:
Does not have a charge over company assets.
Unsecured notes carry a higher interest rate due to the higher risk.

11. Other Forms of Company Debt
Commercial bills:
The Drawer - issues the bill and borrows funds
The Drawee/Acceptor – is liable on the bill to the Payee
The Payee – purchases a bill

12. Other Forms of Company Debt
Promissory notes: A negotiable instrument and differs from a commercial bill in that the borrower’s name appears on the note.

13. Difference Between Debt and Equity Finance
3.2
Difference Between Debt and Equity Finance

14. Debt financing is indirect
Debt Finance
Debt is an investment in the form of a loan.
The borrower pays the lender an agreed rate of interest.
Debt financing is indirect

15. Equity Equity is a direct investment.
The investor buys shares in the company, giving the owner part ownership of that company.

16. Examples of Equity and Debt
Ordinary shares
Preference shares
Company options
Property trusts
Equity trusts
DEBT
Debentures
Unsecured notes
Promissory notes
Bills of exchange
Treasury notes and bonds

17. Characteristics of a Debt Instrument
Fixed maturity date
Defined interest payments
Face value
Interest rate tied to risk
Short term or long term
Negotiable
Mostly have a secondary market
Secured or unsecured

18. Characteristics of Equity Instruments
Equity investment in a company gives the investor a part ownership and a share in company profits.
Non-listed equity investments are traded outside the official market.

19. Characteristics of Ordinary Shares
They do not have a limited life.
They do not have a fixed rate of return. Dividends do not have to be paid.
Issued (face) value has little relevance after issue.
Capital growth is important.
Voting rights are attached.

20. Characteristics of Preference Shares
Fixed rate of return.
Preference over ordinary shareholders at liquidation.
Ranked below debt investors (eg debenture holders).
Limited or no voting rights.

21. What are Company Options?
These are options issued to shareholders to purchase additional shares.
They have an exercise price and expiry date after which the option to purchase shares lapses.

22. What is marketability?
Marketability is the ability to trade a security quickly and get prompt payment/delivery.
A deep market refers to the ability to buy and sell securities readily.
High risk = low marketability.

23. Marketability of Listed Equity Investments
The share market allows a conversation of shares into cash.
Turnover statistics are an indication of a company’s marketability.

24. Marketability of Debt Investments
Marketability of debt investments depends on the risk involved, as determined by:
Credit risk of the issuer
Length of time to maturity

25. Accounting for Debenture Issues
3.3
Accounting for Debenture Issues

26. Example: Issue of Debentures Payable in Full on Application

27. Interest Payments

28. Redemption at Maturity
3.4
Accounting for
Redemption at Maturity

29. Redemption at Maturity

30. Redemption Prior to Maturity
Debentures redeemed prior to maturity will be redeemed at a discount or a premium to face value.
Its market value will rise or fall if market interest rates change.

31. Redemption at a Premium
Example:
Carlton Ltd had issued 150,000 $100 10% Debentures. Maturity date is 31 August. On 15 April, the company purchased on the Stock Exchange 30,000 of the debentures at a price of $102.

32. Redemption at a Discount
Example: International Design Ltd issued 5,000 $100 7% Debentures on 1 February. Maturity date is 31 December. On 1 July, the company purchased on the ASX 5,000 of the debentures at a price of $95.