The term “debenture” is used in slightly different ways around the world. Roughly, a debenture is a debt and the term may refer to the debt itself, the document which states the terms of the debt, or a type of security issue made by a company in the form of debt, such as a bond. The type of debenture under discussion may or may not be clear from the context. If there is any confusion or doubt, it is advisable to ask.
In the finance world, a debenture is a financing instrument. Governments and large corporations issue debentures as a way of raising capital. People who buy the debentures are entitled to repayment on a set schedule and also receive interest. In some regions, debentures are primarily unsecured, which means that the holders of these debts are considered general creditors in the event of a bankruptcy. This means that they are not first in line for repayment of debts. By contrast, in other regions of the world, companies usually issue secured debentures.
One example of a debenture is a bond issued by the United States Treasury. Treasury Bonds illustrate a common feature of unsecured debentures, which is that they are usually issued by companies or governments with a strong reputation to back the debt. People are willing to invest because they believe that the chances of default are extremely low and therefore even though the debt is not secured, the chances of not recovering the money are unlikely.
Companies can issue convertible or nonconvertible debentures. People who purchase convertible debentures have the option of receiving their repayments in cash or stock. The interest rate on such debentures tends to be lower because the ability to exercise an option to take stock instead of cash is viewed as an extra feature. The terms of the conversion can vary, depending on the issuer, and it is advisable to read them over before committing to the purchase of convertible debentures.
A debenture can also related to a debt which is not associated with government or corporate attempts to raise capital. When people enter into a debt, they are usually required to sign a contract which sets out the terms of the loan agreement and establishes a repayment plan. The resulting contract is a form of debenture because it acknowledges the debt and provides information about the terms and the parties involved in the loan.
