DEBENTURE

What is a Debenture?

A debenture is a type of debt instrument or a bond that is unsecured by the collateral. Debentures don’t have collateral backing and rely on the reputation and creditworthiness of the issuer. Both governments and corporations issue debentures to raise capital or funds.

POINTS TO REMEMBER

•          A debenture is a bond or a type of debt instrument that doesn’t have any backing by any collateral.

•          It has a period greater than 10 years.

•          They are backed by the reputation and creditworthiness of the issuer.

•          Both corporations and governments frequently issue debentures to raise funds.

•          Some debentures can be converted to equity shares.

Debentures Explained

Debentures pay a periodic interest payment that is known as coupon payments similar to bonds. Debentures are documented and filed in indenture which is a binding and legal contract between the bondholders and the bond issuer. It specifies the features of the debt offering, like the maturity date, the timing of coupon payments, other features, and the method of interest calculation. Governments and corporates can issue debentures.

Debentures are used by the corporations as long-term loans that are unsecured. The debt instruments are redeemable and repayable and also pay an interest rate on a fixed date. Debentures carry longer repayment dates and lower interest rates hence they are advantageous for companies.

Features of a Debenture

When a debenture is issued, first a trust indenture is drafted which is an agreement between the trustee and the issuing corporation who manages the investor’s interest.

Interest Rate

The interest rate is determined that the company pays to the debenture holder or investor. This coupon or the interest rate can be floating or fixed.

Credit Rating

The corporation’s credit rating and the debenture's credit rating impact the investor’s interest rate that they receive.

Maturity Date

The maturity date dictates the company the time to pay back the debenture holders.

Convertible vs. Non-convertible Debentures

Convertible debentures are the bonds that can be converted into equity shares after a specific period. They are hybrid financial products that give you the benefits of both equity and debt. Debentures are used as fixed-rate loans by the company to pay the fixed interest payments.

Non-convertible debentures are the debentures that are not converted into equity shares of the issuer. The investors are rewarded with a higher rate of interest to compensate for the lack of convertibility when compared to convertible debentures.

Advantages of a Debenture

•          A debenture pays a regular coupon rate return to the investors.                     

•          They can be converted to equity shares after a specified period.       

•          The debenture holders are paid before the common stock shareholders in the event of bankruptcy of a corporation.

CONCLUSION

Debentures don’t have any collateral backing and rely on the reputation of the corporation. Some debentures that cannot be converted into equity shares reward the investor with a higher interest rate.