What Are Debentures

A debenture can be defined as a loan issued by a firm which usually involves a fixed repayment schedule, in terms of both time and interest. If the firm keeps to the terms of the debenture, the person who owns the debenture has no claim on the company and no voting rights. However if the firm were to default on the repayment of a debenture, the holders of the debentures will have right over the company.
A Debenture (usually not backed by collaterals) is a long- term debt instrument, issued by governments and big institutions for the purpose of raising funds. Debentures are unsecured debt backed by the credit worthiness and reputation of the debenture issue and documented by an agreement called an indenture. The Debenture issue has a substantial advantage from issuing a debenture because the particular assets are kept without any financial limitations so that the option is open for issuing them in future for financial purposes.
Debentures and Bonds
The Debenture has some similarities with Bonds but the terms and conditions of securitization of Debentures are different from that of a bond. A debenture is regarded as an unsecured investment because there are no pledges (guarantee) or liens available on particular assets. However, a debenture is backed by all the assets which have not been pledged otherwise.
Debentures- free negotiable Debt instruments
Debentures are referred to as free negotiable Debt instruments. The Debenture holder functions as a lender to the issuer of the Debenture. In return a specific rate of interest is paid to the Debenture holder by the Debenture issuer similar to the case of a loan. In some cases, Bonds are also termed as Debentures and vice- versa and in the case of a bankruptcy, Debenture holders are considered as general creditors.
Classification of Debentures
Debentures are categorized into the following types
Convertible Debentures is a debenture which can be converted into some other type of securities.
Corporate Debentures