Question

The debentures which do not carry a specific rate of interest are known as:

• A. Irredeemable debentures
• B. Bearer debentures
• C. Specific coupon rate debentures
• D. Zero coupon rate debentures

Hint:

Zero Coupon Debentures:

• No periodic interest payment
• Issued at discount, redeemed at face value
• Difference = Return to investor

Other debentures by interest: Fixed Rate, Floating Rate. By security: Secured, Unsecured. By redemption: Redeemable, Irredeemable.

Answer 1

The Correct Option is D

We are asked to identify the type of debentures that do not carry a specific rate of interest.
Step 1: Understand different types of debentures based on interest.

• Zero Coupon Rate Debentures: These debentures do not carry any specific rate of interest. Instead, they are issued at a discount and redeemed at face value. The difference between issue price and redemption price represents the return to the investor.
• Specific Coupon Rate Debentures: These carry a fixed rate of interest (coupon rate) payable periodically.

Step 2: Other types of debentures (not based on interest).

• Irredeemable Debentures: Debentures that are not repayable during the lifetime of the company (or repayable after a very long period). They carry interest but are irredeemable.
• Bearer Debentures: Debentures that are transferable by mere delivery. Interest is paid to the bearer. They do carry interest.

Step 3: Analyze each option.

• (A) Irredeemable debentures:
  • Incorrect. Irredeemable refers to repayment period, not interest rate. They usually carry interest.
• (B) Bearer debentures:
  • Incorrect. Bearer refers to transferability, not absence of interest.
• (C) Specific coupon rate debentures:
  • Incorrect. These have a specific rate of interest.
• (D) Zero coupon rate debentures:
  • ✓ Correct. These do not carry any specific rate of interest; returns come from discount on issue.

Final Answer: (D) Zero coupon rate debentures