What is Debenture?

Debenture Definition

A debenture is a debt vehicle that is backed solely by the credit worthiness of the issuer.

They are a type of bond that is supported by the issuer’s reputation and credit history rather than any type of collateral.

Debentures are issued by both corporations and governments to raise capital.

They offer regular interest payments, called coupon payments, until their date of maturity.

Purpose of Debenture

The purpose of a debenture is to raise capital through a slightly different debt structure than that of a traditional corporate bond.

Debentures offer several advantages for corporations.

For example, debentures:

  • Can be used as long-term loans
  • Can be issued with lower interest rates
  • Have a longer repayment date
  • Do not risk assets

Advantages of Debenture

Debentures also offer advantages to investors, such as:

  • Payment priority over common stockholders (but not over secured bondholders)
  • Regular, long-term interest payments

A debenture may also be convertible, meaning that it may be converted into equity shares after a certain date if the investor desires.

Convertible debentures are appealing to investors if they believe that the company’s stock will rise in the long term.

Convertible debentures often carry a lower interest rate than their non-convertible counterparts, however, due to the added safety of convertibility.

Disadvantages of Debenture

Debentures have some disadvantages as well. Since they are unsecured, in the event of bankruptcy, debenture holders have no guarantee of reimbursement.

Furthermore, debentures usually offer lower interest payments than traditional bonds, and payments to debenture holders are prioritized below payments to regular bondholders.

What is (CapEx) Capital Expenditure FAQs

A debenture is a debt vehicle that is backed solely by the credit worthiness of the issuer.
The purpose of a debenture is to raise capital through a slightly different debt structure than that of a traditional corporate bond.
Debentures offer advantages such as payment priority over common stockholders and regular, long-term interest payments.
Debentures have some disadvantages as well. Since they are unsecured, in the event of bankruptcy, debenture holders have no guarantee of reimbursement.