Debentures are debt instruments that the borrower issues in order to raise funds. The company issuing the debentures offers a periodic interest payment to the debenture holders until the maturity of the debenture. The interest can be paid monthly, quarterly, semi-annually, or annually and is normally based on coupon payment on the principal value also called the face value or par value.
A company-issued 500, $1,000 debentures and offered a 12% interest payable every six months for 5 years. Let’s assume that all the debentures were purchased, so the company will raise funds of $500,000 in cash and liability will appear in the balance sheet. After 6 months the company will pay an interest of $30,000 ($500,000 x 12% x 6/12) to debenture holders. This will continue until the debentures are matured at the end of five years. Then the company will repay the principal value to the debenture holders.
Planter Corporation used debentures with a par value of $625,
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