Debenture

A debenture is a form of corporate or government (treasury bond or treasury bill) borrowing that is not quite the same as a traditional bond. The primary difference between a traditional bond and a debenture is a debenture isn't secured by a specific asset, but instead the lender depends on the credit of the issuer.

Features

• The two corporations and governments every now and again issue debentures to raise capital or funds.
• A few debentures can change over completely to equity shares while others can't.
• Debentures are backed simply by the creditworthiness and reputation of the issuer.
• A debenture is a type of debt instrument that isn't backed by any collateral and generally has a term greater than 10 years.

FAQ

Are Debentures Risky Investments?

Since debentures are debt securities, they will quite often be safer than investing in similar company's common stock or preferred shares. Debenture holders would likewise be viewed as more senior and take priority over those different types of investments on account of bankruptcy.Because these debts are not backed by any collateral, in any case, they are innately riskier than secured debts. Subsequently, these may carry moderately higher interest rates than in any case comparable bonds from the very issuer that are backed by collateral.In truth, rigorously talking, a U.S. Treasury bond and a U.S. Treasury bill are the two debentures. They are not secured by collateral, yet they are viewed as risk-free securities.

How Are Debentures Structured?

All debentures follow a standard organizing process and have common elements. Initial, a trust arrangement is drafted, which is an agreement between the responsible entity and the entity that deals with the interests of the bondholders. Next, the coupon rate is chosen, which is the rate of interest that the company will pay the debenture holder or investor. This rate can be either fixed or floating and relies upon the company's credit rating or the bond's credit rating. Debentures may likewise be either convertible or non-convertible into common stock.

Is a Debenture Different From a Bond?

A debenture is a type of bond. Specifically, it is an unsecured or non-collateralized debt issued by a firm or other entity and as a rule alludes to such bonds with longer maturities.