A Presentation on“Types of debt Security”Presented by:Patel Lalji (KIM-MBA-10-329)
Introduction What is security? A security is a negotiable financial instrument. Negotiability refers to the fact that its legal ownership is readily capable of being transferred from one owner to another by delivery or endorsement. What is debt security? A debt security is a negotiable financial instrument serving as indication of a debt.
Types of Debt Security Types of Debt securityTerm loans Lease Debentures Bonds
A. Term Loans A term loan is a monetary loan that is repaid in regular payments over a set period of time. Term loans can be given on an individual basis but are often used for small business loans. Term loan purpose can be new industrial units, expansion, purchase second hand machinery. Term loans are a good way of quickly increasing capital in order to raise a business supply capabilities or range. Term loan is whether the interest rate is fixed or floating. Institutions offer a variety of repayment plans for your term loan.
SME TERM LOANS (BOB) ELIGIBILITY CRITERIA Satisfactory credit rating for the last three years Latest Balance Sheet etc. should be available. Satisfactory financial performance in terms of Sales/turnover and profits. Negative variance, if any, should not be more than 10%. Total Debt-equity ratio should not be higher than 4.5:1 and total Term Liability and equity ratio should not be more than 3:1 LOAN AMOUNT: Upto 25% of the existing fund based Working capital limits. Minimum of Rs. 25 Lakhs and maximum of Rs. 500 Lakhs.
B. Lease A lease is defined as a contractual arrangement in which a party owning an asset (lessor) provides the asset for use to another or transfer the right to use the equipment to the user (lessee) for an agreed period of time for return for periodic payments (lease rentals). Property may be obtained by leasing, such as Motor vehicles, Buildings, Construction equipment, Computers, Aircrafts, Ships and other office equipment.
Essential Elements1. Parties to contract2. Assets3. Ownership Separate from User4. Term of lease5. Lease Rental Types of Leasing1. Operating lease2. Financial lease3. Sale and lease back4. Leveraged lease
C. Debenture A Debenture is a debt security issued by a company (called the Issuer), which offers to pay interest of the money borrowed for a certain period. These are long‐term debt instruments Issued by Private Sector Companies. These are issued in denominations as low as Rs. 1000 and have maturities ranging between one and ten years. Debentures were issued in physical form. Now corporate/PSUs have started issuing debentures in Demat form. Debentures can be listed on a stock exchange, giving you an opportunity to sell them and exit earlier then the maturity of the debenture.
Types of debentures Basis of convertibility:I. Non convertible debentureII. Convertible debenture Basis of security:I. Secured debentureII. Unsecured debenture Basis of redemption:I. Redeemable debentureII. Non redeemable debenture
D. Bond A debt investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate. Bonds are used by companies, municipalities, states and foreign governments to finance a variety of projects and activities. Bonds are referred to as fixed-income securities. Interest on bonds is usually paid every six months
Type of bonds Classification basis of maturity1. Callable bond2. Puttable bond3. Convertible bond Classification basis of principal repayment1. Amortizing bond2. Bond with sinking fund provision Classification basis of coupon1. Zero coupon rate bond2. Floating rate bond