NCDs: fixed-income bonds that do not turn into shares

An NCD is a straightforward way for a company to borrow from investors while paying a fixed return. This guide explains what non-convertible debentures are, how they work and what to watch for.

Quick answer

An NCD, or non-convertible debenture, is a debt security issued by a company that pays a fixed rate of interest and returns the principal at maturity. Unlike a convertible bond, an NCD cannot be turned into shares. It is a pure fixed-income instrument, so its return does not depend on the share price.

Key takeaways

• An NCD is a debt security paying fixed interest.
• It cannot be converted into shares.
• The principal is repaid at maturity.
• The return does not depend on the share price.
• Credit quality decides much of its risk.

What is an NCD?

An NCD, short for non-convertible debenture, is a debt instrument through which a company borrows money from investors. It pays a fixed rate of interest and repays the amount borrowed on a set maturity date.

The word non-convertible is the key. Unlike a convertible bond, an NCD can never turn into shares. It stays as debt for its whole life, so investors simply earn interest and get their money back.

How does an NCD work?

When you buy an NCD, you are lending to the company. In return, you receive interest payments at a fixed rate, often paid at set intervals, and the principal back when the NCD matures.

Many NCDs are listed on the stock exchange, so they can be bought and sold before maturity. Their price can move with interest rates and the company's creditworthiness.

Why do companies issue NCDs?

Companies issue NCDs to raise money without giving up ownership, since NCDs are debt, not shares. This lets them fund their needs while keeping control with existing shareholders.

For investors, NCDs can offer a fixed return that is often higher than a bank deposit, which is why they appeal to those seeking steady income.

What are the risks?

The main risk is credit risk, the chance the company cannot pay the interest or repay the principal. A weaker company usually offers a higher interest rate to attract buyers, reflecting more risk.

Credit ratings help gauge this. There is also market risk, since NCD prices can fall if interest rates rise, affecting anyone who sells before maturity.

How should investors think about them?

NCDs can suit investors who want fixed income and can judge the issuer's credit quality. The higher the promised rate, the more important it is to check the company's strength.

Understanding NCDs helps you compare fixed-income options sensibly. Any investment decision should be your own after proper research and reading all related documents.

Frequently Asked Questions