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John Moffat.
John Moffat.-
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Roisin
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I have a query as to the understanding of irredeemable debt: why would I want to lend a company irredeemable debt? Seemingly there is no arrangement for repayment of the principle, so it only generates a steady flow of interest payments. So who lends this type of debt? Thinking about it maybe shareholders could use this as an alternative to increasing equity, enjoying the tax deduction, and still guarantee that they receive an interest payment, rather than a dividend which might not happen. So it could be seen as a more secure option for them for putting in funds. Am I on the right track? Perhaps I have missed the explanation in the lecture, in which case I apologize.
John Moffat
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Firstly, in real life, debt is virtually always redeemable (and in the exams debt is more often redeemable (because there is more work to do) but sometimes they do have irredeemable debt).
However, irredeemable debt may be attractive to some people – partly because they get income that they can be certain about, partly because the interest might be higher than that being paid by banks etc., and of course if they want their money back then they can always sell it to others on the stock exchange 🙂
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