Q. Consider the following statements: Debentures are generally not backed by any collaterals Non-Convertible Debentures generally carry higher rates of returns that convertible debentures Which among the above statements is / are correct?
Answer: Both 1 & 2 are correct
Notes: Debentures are issued by big companies and the government with the intent of raising funds and these instruments are not backed by any collaterals. The debenture holders usually have the option of converting their debentures into shares of the company. Non-convertible debentures are those that do not have any such rights and privileges. As these debentures are non-convertible, they usually carry higher rates on interest. The debenture holder has no present or future stake in the company due to the non-convertibility element and therefore earns a higher rate of interest.

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