A debenture is a type of bond or debt instrument that is unsecured by collateral. It is a long-term debt instrument used by large companies to borrow money at a fixed rate of interest. Debentures are unsecured bonds issued by corporations to raise debt capital. They are essentially a long-term loan that a corporate or government raises from the public for capital requirements. Debentures are not backed by any form of collateral, making them inherently more risky than secured bonds. Because of the increased risk, debentures carry a comparatively higher interest rate in order to compensate bondholders. Debentures 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. Key features of debentures include:
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Unsecured: Debentures have no collateral backing and must rely on the creditworthiness and reputation of the issuer.
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Long-term: Debentures usually have longer maturities than other types of bonds.
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Interest payments: Investors usually receive only interest payments during the loan period and then receive the full principal when the debenture matures.
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Credit ratings: Investors can check the credit ratings of debentures before investing in them.
Debentures can be a financing option for companies that have pledged all their assets as collateral elsewhere, as they have a longer holding period and lower interest rates than other types of long-term financing.
