Debentures are debt securities issued by companies or by the government in order to attract liquidity for investments that last in the medium to long term.
Whoever invests in this debt instrument starts to lend capital to the institution, receiving interest and the loan’s return after a certain time.
This investment is considered to be fixed income, where the conditions are known since the beginning of the investment.
How Debentures Work
Debentures are one of the ways that a company can use to raise funds that can be invested. In this case, the company only borrows money and returns it to investors with interest.
From the company’s point of view, the issue of debentures constitutes a debt that must be paid after a period of time, without changing its equity.
Debentures are issued by publicly-held or publicly-held corporations, as a way of attracting third party capital to finance projects or also to pay debts.
In this modality, the company finances itself with this capital from third parties, and it can be a more viable form than borrowing from a bank, for example.
When investing in debentures, the investor lends his money to the company that issued the debt security and receives it back with a return for the time invested.
Debentures are different from shares, which are issued to attract capital from investors who want to participate in the company as shareholders. In this case, the company’s profits are profitable and may be uncertain, in a profitability known as variable income.
Some debentures can be issued with the option to convert the investment into shares and share in the company’s profits.
All the characteristics of the security issued are formulated by contract, containing interest and maturity payment dates, debenture remuneration rate, nominal value and other characteristics.
Types of debentures
Debentures may adopt rates known at the beginning of the application, the fixed rates, or post-fixed rates that adopt a fixed part plus a coefficient. Rates such as the Selic rate or the IPCA index, for example, can be used.
As an investment form, debentures can be issued in registered form – directly to the investor -, or in book-entry form maintained by a regulated financial institution.
Debentures can also be differentiated by the way in which the investor receives profitability and the money invested as specified. Here are the most common types:
The return is made in a simple way, with principal plus interest and in local currency, and part of the interest may already be paid in coupons, periods before maturity.
Unlike the previous case, in the convertible debentures the investor is offered the option so that he can acquire shares of the issuing SA.
Debentures may be accompanied by interchangeability clauses, in which the investor can exchange the invested capital for other assets or shares of another company.
There are also other types, such as incentive debentures, in which there is no longer any incidence of IOF and Income Taxes as a way of attracting more investors to the project.
How to invest in debentures
Debentures are issued by corporations and are listed on the capital market, and can be easily found in authorized financials.
In online brokers, debentures appear with investments in fixed income or in own investment funds.
In addition, the debentures are divided into the primary market, when the first issue exists, and the secondary market. In the latter, an individual may resell the investment to other investors.