Page 49 - Ebook Financial Accounting 3

Financial
Instrument

Liability Share Equity

Redeemable Covertible
Preference Debenture
Shares Loan Stocks

Figure 3.1

3.1 Types of liability instruments:

a) Redeemable preference shares
➢ Redeemable Preferences shares are those type of preference shares issued to

shareholders which have a callable option embedded, meaning they can be redeemed
later by the company.

➢ It is one of the methods that companies embrace in order to return cash to the existing
shareholders of the company.

b) Debentures
➢ Debentures refer to long-term debt instruments issued by a government or corporation

to meet its financial requirements.
➢ In return, investors are compensated with an interest income for being a creditor to the

issuer.

c) Convertible loan stocks

➢ Usually refers to loans which may be converted into shares at a later date.
➢ Typically, the lender will receive interest for the duration of the loan and will then

either convert the loan principle to shares or demand repayment, depending on which

option is the most profitable.

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