A loan stock is a type of fixed income security, a loan that is made to a company. Although the term might suggest otherwise, the holder of a fixed income security is merely the company’s creditor and does not have any say in their business. There are two types of fixed income security: loan stock and debenture.
Unsurprisingly, loan stock is stock granted in exchange for a loan. There are two basic kinds. The first kind, unsecured loan stock, basically means that the company receiving the loan offers no collateral to guarantee that the loan will be paid. In other words, if the company defaults on the loan, the creditor has no right to the company’s property as repayment. This type is therefore very much like the unsecured loans individuals can get.
The second kind is called convertible loan stock. It offers the company a low, fixed interest rate. The creditor benefits by having the ability to convert the loan stock into actual shares in the company. The loan contract sets forth specific terms and a time frame for its conversion.
Debenture, the second type of fixed income security, is different in that it is a secured loan. However, the way that a debenture is secured is not quite the same as when an individual or an entity offers a specific piece of property as collateral. In cases of collateral, the specific property is turned over to the creditor to sell for payment if the individual or entity defaults on the loan. In the case of a debenture, the loan is secured only loosely so, as there is no specific property assigned as collateral: if the company defaults on the loan, the creditor may sell any part of the company’s property that has not already been promised on other accounts as collateral, and can claim the proceeds as payment. Debentures benefit the company receiving the loan by leaving their property free to be used as collateral for other financing.
