MBA Accounting

FIXED INCOME SECURITIES:

The holders of the fixed income securities are creditors of the company rather than shareholders:

Have no rights in the company beyond the payment of a fixed interest on their loans and repayment of the loans in accordance with the terms on which they were issued.

Fixed income securities may be secured or unsecured, with the secured fixed income securities ranking before the unsecured.

The two (2) principal types of fixed income securities are debentures and loan stocks.

DEBENTURES/DEBENTURE STOCKS

A debenture is similar to a mortgage;

It is a long-term loan secured on certain fixed or floating assets of a company;

A debenture stock is a debenture issued as a fixed-interest stock;

Such securities are issued under trust deeds, and in the event of the borrower defaulting on the interest or capital repayment, the debenture holder has the right to appoint a receiver to sell the company’s assets and secure repayment of the loan;

LOAN STOCKS

A loan stock is a security issued by a company in respect of a loan made by investors;

Loan stocks may be secured, unsecured, convertible or non-convertible, but are often unsecured, unlike debentures;

Unsecured loan stocks

carry higher risk than debentures, and in the event of a winding-up, unsecured loan stock holders rank alongside all other unsecured creditors.

Convertible loan stocks

carry the right to convert into ordinary shares of the company on pre-arranged terms and within a limited period. The objective of issuing a convertible loan stock is to obtain fixed interest finance at a relatively low rate of interest and at the same time make it attractive to potential holders by the offer of equity participation at a later date.

NOTES

These are also fixed income securities with a maturity date, and may or may not be redeemable.

BONDS

Like debentures, bonds are fixed income securities issued to lenders of long-term loans, and with a maturity date.

SHARE CAPITAL:

A share is a security which represents a portion of the owner’s capital in a business. Shareholders are the owners of the business. They share in the success or failure of the business. This can be measured by the amount of dividends that they receive and by the price of the share, quoted on the stock market. (In the U.S., shares are referred to as common stock.)

There are several types of share capital:

(1) ORDINARY Share Capital

· Also known as equity shares, this is the risk capital of a company;

· Ordinary shares give holders the rights of ownership in the company, such as the right to share in the profits, the right to vote in general meeting and to elect and dismiss directors;

· Obligations of ownership are also conferred and this may result in the loss of an investor’s money if the company is unsuccessful;

· Ordinary shares usually form the bulk of a company’s capital and have no special rights over other shares and

· In the event of liquidation, ordinary shares rank after all other liabilities of the company.

(2) PREFERENCE Shares

·  Shares which carry the right to dividend (normally fixed) which ranks for payment before that of ordinary shareholders;

·  Preference shares may be preferred also as regards distribution of assets upon dissolution of the company;

·  Generally carry no voting rights, but voting rights may be made contingent upon failure to pay dividends on preference shares for a certain period of time

·  There are several types of preference shares which are as follows.

(a) Participating preference shares

are entitled to participate in the profits beyond the fixed dividends, by way of an additional fluctuating dividend if the company is successful.

(b) Cumulative preference shares

are preference shares which, apart from having a preferential right to receive a fixed dividend ahead of ordinary shares, also carry the right of any arrears of the preference dividends which may have built up.

 © Non-cumulative preference shares

are preference shares which are not entitled to any arrears in dividends.

(d) Redeemable preference shares

may be redeemed by the company at a stated redemption price on advance notice of a period of time. It is usual to set a redemption price above the par value to compensate the owner for the involuntary loss of his investment.

(e) Convertible preference shares

are preference shares which carry the right to be made convertible, at the option of the holder, into another class of shares, normally into ordinary shares.