Understanding Debenture Issue and Redemption

Debentures are a type of long-term debt instrument issued by companies to raise funds. When a company issues debentures, it borrows money from the public or institutions and promises to repay the principal amount at a future date, along with periodic interest payments.

The issue of debentures can happen at:

• Par: The issue price is equal to the face value of the debenture.
• Premium: The issue price is more than the face value.
• Discount: The issue price is less than the face value.

The redemption of debentures is the process by which the company repays the principal amount to the debenture holders. Redemption can happen at:

• Par: The redemption amount is equal to the face value.
• Premium: The redemption amount is more than the face value.
• Discount: The redemption amount is less than the face value.

We need to determine which combination of issue and redemption is generally not possible.

Analyzing Debenture Issue and Redemption Options

Let's examine each given option for issuing and redeeming debentures:

Option 1: Issue at Premium, Redemption at Premium

This scenario is possible. The company issues the debenture for an amount higher than its face value (e.g., face value $100, issued at $105) and repays an amount higher than its face value upon maturity (e.g., redeemed at $110). This means the company receives more upfront but pays back even more at the end. The premium on issue is a gain, and the premium on redemption is a loss or cost of borrowing. This is a valid way to issue and redeem debentures.

Option 2: Issued at Discount, Redemption at Discount

In this case, the company issues the debenture for less than its face value (e.g., face value $100, issued at $95) and promises to repay an amount less than its face value upon maturity (e.g., redeemed at $98 or even $90). From the perspective of an investor, they are lending a certain amount (the issue price) but receiving back less than the principal amount (face value) upon redemption. Legally and financially, redeeming debentures at a discount is generally not permitted. A company is obligated to repay at least the face value of the debt upon maturity. Redeeming at a discount would mean the company is not returning the full principal to the investor, which is detrimental to the investor's interest and violates the basic premise of debt repayment.

Option 3: Issued at Par, Redemption at Premium

This scenario is also possible. The company issues the debenture at its face value (e.g., face value $100, issued at $100) and repays an amount higher than its face value upon maturity (e.g., redeemed at $105). The premium on redemption ($5 in this example) is a cost to the company, representing an additional return for the investor. This is a common practice, especially when the interest rate offered is slightly lower than market rates; the redemption premium compensates the investor.

Option 4: Issued at Discount, Redemption at Par

This scenario is possible. The company issues the debenture for less than its face value (e.g., face value $100, issued at $96) and repays the face value upon maturity (e.g., redeemed at $100). The difference between the face value and the issue price ($4 in this example) is the discount on issue. This discount is typically treated as a capital loss for the company that is written off over the life of the debenture. From the investor's perspective, they invest $96 and get back $100, making a gain of $4 besides receiving periodic interest. This is a standard way to issue debentures.

Conclusion on Impossible Debenture Scenarios

Based on the analysis, the scenario where debentures are Issued at Discount and Redeemed at Discount is generally not possible or permissible under company laws designed to protect debenture holders (creditors). Companies must typically redeem debentures at face value (par) or at a premium.

Therefore, the option that is generally not possible regarding issue and redemption of debentures is Issued at discount, Redemption at discount.

Revision Table: Key Debenture Terms

Additional Information on Debenture Redemption Rules

Company laws in most jurisdictions mandate that debentures must be redeemed at par or at a premium. This regulation exists to safeguard the interests of the debenture holders, who are creditors of the company. Allowing redemption at a discount would permit the company to repay less than the principal amount borrowed, which would be unfair to the investors and undermine confidence in corporate debt instruments.

The face value of a debenture represents the principal amount that the company is obligated to repay upon maturity. While the issue price can vary depending on market conditions and the debenture's terms, the redemption value is typically fixed at face value or a predetermined premium at the time of issue. Any deviation below the face value at redemption is generally prohibited.