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(^46) Financial Management
Maturities
Debentures are sometimes grouped by the length of time until maturity that existed on
the date the debenture was first issued. Money Market Securities mature in 364 days
or less. Short-term debentures are those maturing within 1 to 3 years. Medium term
debentures mature between 5 to 8 years and long term debentures are the ones who
have a maturity life of 10 years or more.
Redemption
Redemption is the repayment of the debt security at or before maturity. Redemption
could at par or at a premium to face value. A debt security will be redeemed before
maturity if the issuer feels that he can borrow the same amount at a lower rate of
interest or he does not require the funds any longer. If there is a premature redemption
(redemption before the maturity date), a premium is usually paid to the debenture holders.
Call/ Put Options Provision
A call/ put option provision allow both the issuing company and the investor to redeem
the bonds at a specified amount before the maturity date. Long term bonds (10 years
or more) usually have a call/ put option is attached to the bond which is (usually)
exercisable after every 5 year intervals. In this case the issuing company has a call
option that it can call back the bonds and repay to the investors the principal and interest
due till that date. If the issuer exercises his call option the investor has no recourse but
to submit his bonds and get the money. Similarly the investor has a put option, in which
case he has an option to return the bonds and get the principal and interest till that date.
As in earlier case if the investor exercises his option, the company has no recourse but
to pay the investor.
Issuing corporation will use the provision if the interest rates fall substantially below the
coupon rates offered on the security and the investor will use the put option if he can
get better returns elsewhere.
For bonds with call/ put options the yields are calculated to the nearest year at which
the call/ put option is exercisable. This yield is known as yield to call (YTC) which is
different from the yield to maturity (YTM).
Sinking Fund
A provision that requires the corporation to set aside a fixed amount each year to help
provide for the orderly repayment of the debt issue.
Credit Rating
It is mandatory for the issuing companies to get the credit rating done on debt securities
issues. Credit ratings are also mandatory for Commercial Paper and Fixed Deposits
issues of the companies. Ratings reflect the probability of the companies going into
default. The higher the rating, the lower the risk of default that is associated with the