A debenture is a type of debt instrument used by large companies, governments, and other entities to borrow money at a fixed rate of interest. Here are some key points about debentures:
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Unsecured Debt: A debenture is unsecured by collateral, meaning it does not have specific assets backing it. Instead, it relies on the creditworthiness and reputation of the issuer for support.
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Long-Term Instrument: Debentures typically have a medium- to long-term maturity, often greater than 10 years.
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Risky Nature: Because debentures are not backed by collateral, they are inherently more risky than secured bonds. As a result, they usually carry a higher interest rate to compensate bondholders for the increased risk.
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Convertible Option: Some debentures offer the option to convert the loan into equity shares or hold the loan until maturity and receive interest payments.
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Legal Documentation: Debentures are documented in what is called an indenture, which is a legal contract between bondholders and issuers that specifies debt offering features such as interest calculation method, payment timing, and maturity date.
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Use in Corporate Finance: Companies commonly use debentures as fixed-rate loans and may offer the option to convert the loan into equity shares. They are used to raise debt capital and are part of the companys capital structure, but they do not become share capital.
In summary, a debenture is a type of unsecured debt instrument used by entities to raise capital, and it is important for investors to carefully consider the creditworthiness of debenture issuers due to their inherent risk.
