What is Debenture? Debentures Meaning

A short definition of debentures

A debenture is a long-term financing option for businesses that do not require collateral or result in equity dilution.

A debenture is a type of bond or debt that is not backed by collateral. Debentures are backed by the issuer's creditworthiness and reputation. Debentures are often issued by corporations and governments in order to raise capital or funds.

A debenture is a long-term debt instrument that is not backed by any collateral and usually has a term greater than 10 years.

Debentures are only as strong as the issuer's creditworthiness and reputation.

Both corporations and governments often issue debentures to raise money or funds.

Some debentures can convert into equity shares while others cannot.

Features of debenture

A debenture certificate typically contains information on:

the amount of the loan,

the interest rate (coupon rate),

the repayment schedule (payments of interest and principal, sometimes called the redemption schedule), the maturity date, convertibility of the debenture, the credit rating of the debenture, and the seniority of repayment (i.e. when the debenture will be repaid concerning other liabilities in the event of bankruptcy or liquidation).

How are debentures structured?

Debentures are long-term loans that generally mature in five to 10 years. Since they are unsecured, the issuer typically offers a higher interest rate than for a secured loan or bond to offset the increased risk. If a company goes bankrupt or is liquidated, debenture holders are paid after secured creditors but before common and preferred shareholders. Depending on the terms of the debenture, it may be senior to other unsecured loans.

How are debentures redeemed?

Debentures are repaid according to the terms set out in the debenture certificate. This can take many different forms, including:

a lump-sum payment of interest and principal on maturity

annual, semi-annual, or other installment schedules

The company may choose to convert all or some of the debt into equity shares, or issue a new debenture.

?

Types of Debentures Convertible vs. Nonconvertible

Debentures that can be converted into equity shares of the issuing corporation at the holder's discretion after a set period are known as convertible debentures. These hybrid financial products offer the benefits of both debt and equity, making them attractive to companies. With debentures, companies can take out fixed-rate loans and make fixed interest payments. However, holders of the debenture can choose to either hold the loan until maturity and receive the interest payments or convert the loan into equity shares.

Convertible debentures are appealing to investors that want to convert to equity if they think the company's stock will increase in the future. However, the ability to convert to equity comes at a cost since convertible debentures pay a lower interest rate compared to other fixed-rate investments.

Debentures that cannot be converted into equity are called non-convertible debentures. Because they lack convertibility, investors receive a higher interest rate than they would on convertible debentures.

Advantages And Disadvantages of Debentures

Advantages

A debenture is a type of bond that pays periodic interest payments, called coupon payments, to investors. Convertible debentures can be exchanged for equity shares after a specified period, making them more attractive to investors. In the event of a corporation's bankruptcy, the debenture is paid before common stock shareholders.

?

Disadvantages

Different types of debentures may have varying degrees of exposure to interest rate risk. For example, fixed-rate debentures are less exposed to interest rate risk than floating-rate debentures in environments where market interest rates are rising. The creditworthiness of the underlying issuer is also an important factor to consider when assessing the default risk of a debenture. In addition, debentures may also be subject to inflationary risk if the coupon payments do not keep pace with the rate of inflation.

Difference between a debenture and shares

A debenture is a long-term loan that appears as an item on a company's balance sheet. The company's shares are its obligation to shareholders; their value is reflected in the shareholders' equity section of the balance sheet.

Difference between a debenture and a loan

Debentures are a type of business loan, but not all business loans are debentures. For example, a secured loan (one that is backed by collateral) is not a debenture. A debenture is issued by the business receiving the loan as a way to promise that they will repay the borrowed amount.

Not all unsecured loans are debentures. Some financial institutions offer working capital loans to businesses that are not secured by collateral. These types of loans are issued by the lender, whereas a debenture is issued by the business receiving the borrowed amount.

?

Quantace Smallcase - Invest in Ideas - Smart Quantace Smallcases of stocks

Quantace Strategy offers clients leading professional modern investment products that help them build long-term wealth and offers a way for investors to diversify their stock picking and understand how to better pick stocks. Our baskets are low-cost which is designed to provide the best return at the least risk possible. The baskets can be executed with a single click.

Supported Brokers are IIFL, 5paisa, Angel broking, Kotak securities

Invest Now - Quantace Research | Bluechip Freedom (smallcase.com)

Disclaimer: This article is for information only and should not be considered as recommendation to buy or sell any stocks.