The difference between debentures and preference capital is
that debentures are the debt instrument issued by the
company , which could be secured or unsecured.Debentures
also have call option,convertiblity option.Debentures
holder do not hold the voting right.Debentures could be
converted into common shares.Debentures hold the coupon
payment.At the time of liquidation of the company they are
above the preference shareholders in getting back their
money.They do not have any liblity.
Preference share is long term equity capital of the
company.This is liablity owed by business to
shareholder.Preference share holders are entitled to get
the share dividend before common share holders.They too, do
not enjoy the voting right in annula general meeting of the
company,but voting right can be grated to them in condition
where company deferred the payment of dividend for
consecutive 3 years.They have limited liblity toward the
amount of their investment in the company.
It resembles equity in that: a) Preference dividend is
payable out of distribution of profits. It is not a tax
deductible payment, b) Preference dividend is not
obligatory payment, (in the sense that the payment of
preference dividend is entirely within the discretion of
the directors, though it can be accumulated.)
Preference capital is similar to debentures in several
ways: a)the dividend rate on preference dividend is usually
fixed, b) the claim of preference shareholders is prior to
the claim of equity shareholders, and c) preference
shareholders do not normally enjoy the rights to vote.
Preference capital has a prior claim/preference over equity
capital both on the income and assets of the company.
Preference dividend is cumulative in the sense that all
unpaid dividends are carried forward and payable before the
ordinary dividend is paid
Preference capital has a limited life after which it must
Preference dividend is fixed and is expressed as a
percentage of par value. Non payment of dividend will not
force bankruptcy on the company
Preference capital may sometimes be converted (fully or
partly) into equity shares or debentures at a certain ratio
during a specified period.
Preference share capital ordinarily does not carry voting
rights. It is however, entitled to vote on every resolution
(a) the preference dividend is in arrears for more than 2
years in respect of cumulative preference shares,
(b) the preference dividend has not been paid for a period
of two/more consecutive years or an aggregate period of
three/more years in the preceding six years ending with the
expiry of the immediately preceding financial year.
Debentures are instruments for raising long term debt
capital. Debenture holders are the creditors of the
company. The obligations of the company towards its
Debenture holders are similar to that of a borrower who
promises to pay interest and capital at specified times
When a debenture issue is sold to the investing public, a
trustee is appointed through a deed
A company may issue debentures which are convertible into
equity shares at the option of the Debenture holders.
Often debentures are secured by a charge on the immovable
properties both present and future, of the company by way
of an equitable mortgage. (by deposit of title deeds)
The retirement of debentures involves a substantial
Debenture issues sometimes carry a call provision
Debentures are usually redeemable
The interest payment on the debentures is a fixed
obligation, irrespective of the financial situation of the
Debentures are the long term loan securities of a company.
These securities are considered more secure than shares of
Secondly, a fixed rate of intereset is also paid on
On Preference share a dividend is paid to prospective
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Other Finance Interview Questions
define leverage? explain its types, relative significance
and their features?
Consider the following data for a particular period:
35 % 28 %
4.2 % 30 %
Calculate the following performance measures for portfolio
(P) and the market (M) by using Sharpe, Jensen and Treynor
methods. The T-bill rate during the period was 6 % by
which measures did portfolio P outperform the market $