A debenture is a type of long-term debt instrument used by large companies to borrow money at a fixed rate of interest. It is essentially a long-term loan that a corporate or government raises from the public for capital requirements. Debentures are unsecured bonds issued by corporations to raise debt capital, meaning they are not backed by any form of collateral, making them inherently more risky than secured notes. They are a funding option for companies with solid finances that want to avoid diluting their equity or for fast-growing firms that don’t have a lot of assets. Debentures are a legal certificate that states how much money the investor gave (principal), the interest rate to be paid, and the schedule of payments. Investors usually receive their principal back when the debenture matures, which means the business typically only pays the interest during the loan period and then repays the full principal when the certificate matures.
Some key features of debentures include:
- They are unsecured bonds or debt instruments released by a government authority or company to finance its long-term, capital-intensive projects.
- They are not backed by any collateral, making them inherently more risky than secured notes.
- They rely on the creditworthiness and trustworthiness of the company or government issuing the bond.
- They carry a comparatively higher interest rate in order to compensate bondholders for the increased risk.
- They are a financing option for entrepreneurs who dont want to give up share value or for fast-growing firms that don’t have a lot of assets.
It is important for bond investors to pay careful attention to the creditworthiness of debenture issuers.
