I forgot to include the fact that the debentures holder has to pay full income tax on the 8% interest received
Original post :
If, instead of buying $10,000 of debenture, one were to buy today $10,000 of $2.75 shares, what would the difference be in 5 years time ? Well, 5 years later :
- The owner of the debentures exchanges his $10,000 for 2857 shares, having accumulated also $4,000 in cash ($800 x 5) over the years (not including compounding)
- The owner of the shares still has his 3636 shares (10,000 / 2.75)
Thus the debentures person has $4,000 more but 779 shares less. How much are worth those 779 shares in 5 years time ??? Your guess is as good as mine, but let's just say that if those shares are worth only $5.14 then the final value is the same ( 779 x $5.14 = $4,004 ). But of course in five years, if the SP is at $20, then you're much better off than with the debentures... ( 779 x $20 = $15,580 ) Of course the bright debentures person should buy more ORT shares with his quarterly $200, but even then...
Conclusion : the debentures are for safe investing while optimists can just buy shares.