What Is a Debenture?

Debentures are a type of debt instrument used by companies to raise capital. They are generally issued by large public corporations, and are secured against the issuing company’s assets. They can be traded on public markets like stocks or bonds.

When a company issues a debenture, the borrower promises to pay back a certain amount of money, or principal, to the lender at a certain time. This is called the maturity date. Debentures can also contain interest payments known as coupon payments which are usually paid bi-annually.

Examples of Debentures

Debentures are used by companies to raise capital for a variety of reasons. For example, a company may issue a debenture to fund long-term investments such as research and development, new products, and market expansion.

Another example is corporate bonds. A company may issue bonds to raise capital for a specific purpose. Bonds often have a long maturity date and are secured by the issuer’s assets.

Benefits of Debentures

Debentures can offer companies certain benefits. They are usually a cheaper form of financing than traditional loans, since they can be easily traded on public markets and the interest rate is usually lower than that of a loan.

Additionally, since they are secured by the company’s assets, lenders are better protected if the company fails to make payments or goes bankrupt. This is why they are often favored by larger, more established companies.

Risks of Debentures

Debentures also come with certain risks. Since they are traded on public markets, the price of the debenture can fluctuate with changing market conditions, leading to losses.

Additionally, if a company fails to make payments or goes bankrupt, lenders may not recover all of the money they have invested. This is why it is important for investors to research a company thoroughly before investing in its debentures.

Overall, debentures can be a useful way for companies to raise capital, but they do come with risks. Investors should be aware of these risks and research potential investments thoroughly before making any commitments.