Debenture refers to a long-term debt instrument. The governments and corporations issue debentures in the market in order to collect fund.
The concept of debenture is similar to bonds and the person who buys debenture actually becomes the creditor to the issuing company.
The securitization conditions of the debentures and bonds are different. As the debenture does not require pledging of any assets, it is generally considered unsecured. The debenture holders are treated as general creditors in the cases of bankruptcy.
In other words, a debenture may be defined as the promissory note that is backed by a company?s general credit and is not secured by the lien on any specific property.
The advantage that the issuers enjoy over the debentures is that they leave the assets free of burden hence leaving them open for further financing.
The debentures are often freely transferable by the holders of debenture. Typically, the debenture is a type of debt instrument, which is not secured by collateral or physical asset. It is the reputation and general creditworthiness of the issuer that backs the debentures. The debentures are certificated in the indentures. Debentures are very frequently issued by the governments and corporations to collect funds.
There are three types of debentures available:
The subordinated debenture exhibits lower payment mode than other two debentures types. The subordinate debentures associate higher risk and hence also offer higher interest rates. Subordinated debentures offer higher discount in the secondary money market because it provides higher interest to the debenture holders.
Government debenture is unsecured in nature. Government does not pledge any collateral for the debenture and pays high interest rate to the debenture holders. The government debentures are often called fixed interest debt securities.
Corporation debenture is unsecured debentures issued by the corporations or companies. The company generally pays high interest rate to the debenture holders. In the cases of the bankruptcy, the bond holders are given priority over the debenture holders.
Last Updated on : 1st July 2013