An obligation is a type of debt instrument that is not secured by physical assets. This type of financing is widely used by both governments and large companies in order to obtain funds or liquidity in the form of a loan.
The obligations (debenture in English) are one of the most common forms of financing that large companies can usually opt for, since this type of loan can be repaid on a fixed date and paying a fixed interest rate.
How many types of obligations are there?
There are two types of obligations that you can choose:
- Convertible bonds: are bonds that can be converted into shares of the company that issues them after a specified period of time.
- Non-convertible bonds: unlike the previous ones, they cannot be transformed over time into shares of the issuing company or corporation.
Which of these two bonuses is better? It all depends. On the one hand, convertible bonds are very attractive to investors because of the possibility of transforming them into shares, and companies are interested in them because of their low interest. On the other hand, to compensate, non-convertible bonds have a higher interest.
As a general rule, companies that opt for this modality of finance they pay the interest before they pay the dividends to their shareholders. Compared to other types of loans and debt instruments, obligations have several advantages:
- The interest paid for them is quite low compared to other forms of financing.
- The one to settle the debt contracted is usually distant in time. That is, these are loans that can be repaid in a long time.