Question

Define redemption of debentures. Explain any two methods of redemption.

Hint:

Debenture redemption can be done either by paying the full amount at maturity or by purchasing debentures from the open market at a lower price.

Answer 1

Step 1: Define Redemption of Debentures.
Redemption of debentures refers to the process of repaying the debt amount to the debenture holders, either at maturity or before maturity, through specific methods. It is a means by which the company extinguishes its liability to debenture holders.
Step 2: Methods of Redemption.
There are two common methods for redeeming debentures: 1. Redemption by Payment at Maturity.
Under this method, the debenture is redeemed at its face value on the maturity date. The company repays the full amount of the debenture to the debenture holder upon its due date. 2. Redemption by Purchase in the Open Market.
Under this method, the company purchases its debentures from the open market at market prices before the maturity date. The company may buy back the debentures at a price lower than the face value, thereby reducing its liability.