What Is a Debenture?

What Is a Debenture?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

A debenture is a debt instrument that companies issue to raise capital. This type of loan does not require any collateral, which means the lender relies solely on the creditworthiness and reputation of the borrower. Instead of collateral, a debenture comes with a legal agreement where the company agrees to repay the loan with interest at fixed intervals. Therefore, debentures are more accessible for businesses, but they also come with higher interest rates due to the increased risk for lenders.

Related Questions

1. Are debentures safe?

Debentures carry a degree of risk, as they are not secured by collateral. However, they are backed by the full faith and credit of the issuing company. In case of default, debenture holders are considered creditors and are entitled to be paid from the assets of the company before equity shareholders.

2. What is the difference between a bond and a debenture?

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A bond is a loan that is secured by a specific physical asset or assets of the company. On the other hand, a debenture is an unsecured loan backed only by the creditworthiness and reputation of the issuing company.

3. Can individuals invest in debentures?

Yes, individuals can invest in debentures. They are a common investment option for individuals who seek regular income and are willing to accept a higher risk than government or corporate bonds. They often pay higher interest rates than secured debt of a comparable maturity.

4. What are convertible debentures?

Convertible debentures are a type of debenture that can be converted into equity shares of the issuing company after a specific period. This gives the investors an opportunity to gain from the process if the company performs well, while the company benefits from lower interest rates.

5. How does a company benefit from issuing debentures?

By issuing debentures, companies can raise substantial funds without diluting ownership or giving up control. It’s also a more flexible form of borrowing as companies can negotiate the terms such as the interest rates, repayment schedule, and convertibility.