0Debt Instruments:
- Credit rating → Gilt securities vs Junk bonds.
- Bond vs Debenture.
- Optionally fully convertible debentures (OFCD).
- Other types of Debentures.
- Inflation indexed bonds (IIB).
Credit rating for Sovereign Bonds (Rating of Countries):
- Credit rating companies like CRISIL, S&P, Moody’s etc. also give credit ratings (AA, A, BBB, C, D etc.) to countries based on their eco-political conditions.
- India hold a credit rating in medium risk category just above the junk status.
Factors affecting credit rating:
- Fiscal deficit.
- Inflation.
- Infrastructure.
- Foreign investment.
- GDP growth.
Bond vs Debenture:
- Bond is the terminology used in England while debenture is the terminology used in America.
- The term bond is used for a Government or PSU security while the term debenture is used for private companies securities.
- In India, Bondholders are secured by access to the underlying asset in case of default by the issuer.
- Debentures, on the other hand, are unsecured, with debenture holders not having recourse to assets in the case of default by the debenture issuer.
Optionally fully-convertible debentures (OFCD):
- Investors have option to change Debentures to Shares.
- If debentures are changed to shares then from companies point of view.
- No further interest payment headache.
- No profit to the company → No share.
- Will only share dividend when company makes profit.
- If debentures are changed to shares then from investors point of view.
- If company makes higher profit.
- He will get bigger dividend.
Other Types of Debentures:
- Non-Convertible debentures.
- Partially convertible debentures→ 100 Debenture – Rs. 70 (Non-convertible) + Rs. 30 ( Can be converted to Equity).
- Fully convertible debentures → 100 Debenture → Fully converted to equity (No Choice).
- Optionally convertible debentures → Choice after two years → For ex. 1 Debenture = 3 shares.
- Redeemable vs irredeemable before Maturity period.
- Fixed interest rate vs lndex - linked interest rate (Sensex etc.).
