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Debentures are cheaper source of funds due to the following reasons:
- Interest cost is usually less than the dividend paid on shares Issuance cost is less than the cost for any other form security Tax benefits are available
- Debentures do not dilute the control of existing shareholders since debenture holders do not have any voting rights
- Debentures are preferred for the fixed rate of interest and since they can be redeemed when there is surplus
- Debentures allow trading on equity
- Debentures provide higher rates of financial return and are usually much more rewarding than government bonds or bank investments.
- At the end of the lending period, issuing companies usually offer the choice of converting the debentures for shares (stock or equity).
- Interest is paid to investors whether or not the issuing company makes a profit or not.
- Debentures are transferable from investor to investor.
- The cost of debt is lower than the cost of equity or preference shares as interest is tax deductible.
