| Shares
and debentures Part II
Yvonne
Harvey, Contributor
 |
Cellular
King's Rohan Brooks (left-sitting) explains to a group of students who flock the
display area about the phones they have in stock at the recent Greater Portmore
High Tenth Anniversary Health and Wellness Fair that went under the theme: 'Living
today for a better, brighter future'. At right-sitting is Brooks' assistant Nadine
McLean. - Photo
by Anthony Minott | Greetings
to everyone. Last week, we considered shares as one of the major ways in which
companies could raise capital. If the company requires additional capital to that
provided by the ordinary and preference shareholders, they may issue debentures.
A debenture
is a loan to a company from the general public. These loans carry a fixed rate
of interest and they are very secure investments in that the interest is paid
on the loan whether the company makes a profit or a loss. Also, debenture-holders
are the first investors to be paid out of the profits of the company. As such,
the payments are seen as a cost to the business. If the company has to 'fold up',
the debenture-holders are paid before any of the shareholders. There
is a special type of debenture known as a mortgage debenture. This debenture is
tied to the assets of the company. In the event that little or no profit is made,
the assets of the company will be sold so that the debenture-holders can be paid
their interest. Debenture-holders
receive a debenture certificate. The information on this certificate is similar
to that on the share certificate that I showed you last week. The debenture certificate
serves as proof that one has lent a certain sum of money to the company and is
therefore entitled to a certain amount of interest on their loan per annum. Unlike
shareholders, debenture-holders are not part owners in the company, they merely
lend money to the company. They do not have voting rights in the company. Example
of a debenture certificate An
example of a debenture certificate is shown in CXC Principles of Business, by
Karlene Robinson and Sybil Hamil, (First edition, page 44). You may notice some
similarities and differences between the debenture certificate and the share certificate
that we looked at last week. Please
note that in addition to raising capital through the issue of shares and debentures,
companies may also apply to financial institutions such as commercial banks for
loans. Of course, they will only be given these loans if the financial institution
considers them to be safe borrowers and more than likely, they will have to provide
the institution with some kind of collateral or security so that in the event
that they are unable to repay the loan, the collateral will be sold to recover
the money lent. If
someone signed the loan document as security for the borrower, then in the event
that the borrower is unable to repay the loan, that individual who signed as security
will be required to pay up the balance owing. Assignment
Now
for your assignment. This assignment will draw on information from last week's
lesson as well as on this week's lesson. You are also encouraged to do some additional
reading to enhance the quality of your answer. (a)
(I) Define the terms, 'shares' and 'debentures'. (4 marks) (II) List TWO types
of shares (2 marks). (III) Explain TWO features of any ONE of the shares listed
in II above (4 marks) (b)
(I) What is a debenture? (2 marks ) (II) Outline THREE features of debentures.
(6 marks). (c
) Explain ONE purpose of the share or debenture certificate. (2 marks) Total
marks: 20 Next
week, we will look at co-operatives as our last form of business in the private
sector of a mixed economy. See you then. | 
