Question

The return on debentures is called –

Hint:

Debentures = borrowed capital; therefore return = interest, not dividend.

Answer 1

Debentures represent borrowed capital, therefore the company must pay a fixed return known as interest. This payment is compulsory and treated as an expense in the profit and loss account. It is different from dividends because dividends depend on profit availability, but interest must be paid regardless of profit. Debentureholders are creditors, not owners, so their return is a cost of borrowing. Interest ensures that the company compensates them for using their money for business operations. Hence, the return on debentures is always referred to as interest.