What Does Debenture Mean?
Debenture is a type of debt instrument that is not secured by physical asset or collateral. Debentures are backed only by the general creditworthiness and reputation of the issuer. Both corporations and governments frequently issue this type of bond in order to secure capital. Like other types of bonds, debentures are documented in an indenture.
In law, a debenture is a document that either creates a debt or acknowledges it. In corporate finance, the term is used for a medium- to long-term debt instrument used by large companies to borrow money. In some countries the term is used interchangeably with bond, loan stock or note.
Details explanation of Debenture
Debentures have no collateral. Bond buyers generally purchase debentures based on the belief that the bond issuer is unlikely to default on the repayment. An example of a government debenture would be any government-issued Treasury bond (T-bond) or Treasury bill (T-bill). T-bonds and T-bills are generally considered risk free because governments, at worst, can print off more money or raise taxes to pay these types of debts.
Debentures are generally freely transferable by the debenture holder. Debenture holders have no rights to vote in the company’s general meetings of shareholders, but they may have separate meetings or votes e.g. on changes to the rights attached to the debentures. The interest paid to them is a charge against profit in the company’s financial statements.
Security in different jurisdictions
In the United States, debenture refers specifically to an unsecured corporate bond, i.e. a bond that does not have a certain line of income or piece of property or equipment to guarantee repayment of principal upon the bond’s maturity. Where security is provided for loan stocks or bonds in the US, they are termed ‘mortgage bonds’. However, in the United Kingdom a debenture is usually secured
.In Asia, if repayment is secured by a charge over land, the loan document is called a mortgage; where repayment is secured by a charge against other assets of the company, the document is called a debenture; and where no security is involved, the document is called a note or ‘unsecured deposit note’.
There are two types of debentures:
- Convertible debentures, which are convertible bonds or bonds that can be converted into equity shares of the issuing company after a predetermined period of time. “Convertibility” is a feature that corporations may add to the bonds they issue to make them more attractive to buyers. In other words, it is a special feature that a corporate bond may carry. As a result of the advantage a buyer gets from the ability to convert; convertible bonds typically have lower interest rates than non-convertible corporate bonds.
- Non-convertible debentures, which are simply regular debentures, cannot be converted into equity shares of the liable company. They are debentures without the convertibility feature attached to them. As a result, they usually carry higher interest rates than their convertible counterparts
Debenture is a liability of a company. It is a certificate issued by a company under with seal.
We can say that debenture is a document issued by a company as an evidence of a debt from the company with or without a charge on the assets of the company.
While starting of business the company need large amount of investment. The company borrows funds from banks or other financial institutions. Debentures are a long term liability these are the creditors to the company and the company pay some fixed percentage of interest to the debenture holders.
It is borrowed capital of company .a debenture is a secured to the debenture holder's hands & it can be refundable to them with certain rate of interest. Debenture capital is a borrowed capital of the company. Debentures are redeemed after certain predefined period.
Debentures are a kind of loan taken by the company, who issues a document with the seal to the investor, and pay them a fixed rate of dividend. Every company requires money to start up their business, so it issues shares and debentures for the collection of funds. Debenture means "when company needs a huge capital to start a business and its impossible to company to stand such a huge capital. co. borrows funds from public or financial Institution, on which company pay the fix rate of interest is known as a debentures. It is also called as a borrowed capital of a company
Debenture is an instrument which is used for fundraising by large companies from public/private financial institutions. It is also called borrowed capital. The company gives some fixed rate of interest over these debentures to the debenture holders. Debentures are not secured by any physical asset or collateral. It is only backed by the credit worthiness or reputation of the company whom offered the debentures.
A debenture is an acknowledgement of a debt, given under the seal of the company and constituting a contract for the payment of principal sum on a specified date and for the payment of interest at a fixed rate percent till the principal sum is repaid..........
A debenture is a credit instrument issued by a company in acknowledgement of loan received. A co. may raise long term finance at any time by issuing debentures. Debentures carry fixed rate interest and are normally repayable at the end of the period for which loan is taken.
All of us come across these shares & debentures either in news or in our daily work. But many of us don’t know the basic difference between these terms or even what they mean. Let me give a short description on these & their types.
Characteristics Of Debenture:
1. Each debenture is numbered.
2. Each contains a printed statement of the terms and conditions,
3. A debenture usually creates a floating charge on the assets of the companies,
4. A debenture may create a fixed charge instead of charge.
5. Sometimes debenture holders are given the right to appoint a receiver in case of non-fulfillment of the terms of the debentures by the company.
6. Sometimes a series of debentures are issued with a trust deed by which trustees are appointed to whom some or all the properties of the company are transferred by way of security for the debenture holders.
Difference between Debenture and stocks or bonds
A debenture is an unsecured loan you offer to a company. The company does not give any collateral for the debenture, but pays a higher rate of interest to its creditors. In case of bankruptcy or financial difficulties, the debenture holders are paid after the bondholders. Debentures are different from stocks and bonds, although all three are types of investment. Let us discuss about different types of investment options for small investors and entrepreneurs.
Stocks: When you buy stocks, you become one of the owners of the company. Your fortunes rise and fall with that of the company. If the stocks of the company soar in value, your investment pays off high dividends, but if the stocks decrease in value, the investments are low paying. Higher the risk you take, higher the rewards you get.
Debentures are more secure than stocks, in the sense that you are guaranteed payments with high interest rates. You are paid an interest on the money you lend the company until the maturity period, after which whatever you invested in the company is paid back to you. The interest is the profit you make from debentures. While stocks are for those who are willing to take risks for the sake of high returns, debentures are for people who want a safe and secure income.
Bonds are more secure than debentures. In case of both, you are paid a guaranteed interest that does not change in value irrespective of the fortunes of the company. However, bonds are more secure than debentures, but carry a lower interest rate. The company provides collateral for the loan. Moreover, in case of liquidation, bondholders will be paid off before debenture holders.
A debenture is more secure than a stock, but not as secure as a bond. In case of bankruptcy, you have no collateral you can claim from the company. To compensate for this, companies pay higher interest rates to debenture holders.
So people, keep in mind these few things whenever you are planning to invest in any company, the further classification would be there in the upcoming blogs.
According to companies act 1956 India Debenture includes stocks, bond and any other securities of company whether constituting a charge on asset or not.
- Generally private sector companies issue debentures and publics sector and financial institutions issue bonds.
- Bond is a long term debt instrument that promises to pay a fixed annual interest over a specific period.
- Debentures may be convertible into equity shares while bonds are not.
- Debentures may be redeemed in installment.
|A corporate bond that is not secured by specific property. In the event that the issuer is liquidated, the holder of a debenture becomes a general creditor and therefore is less likely than the secured creditors to recover in full. Because of their high risk factor, debentures pay higher rates of interest than secured debt of the same issuer.|
A debt security, issued by a government or large company, that is not secured by an asset or lien, but rather by the all issuer’s assets not otherwise secured. That is, a debenture carries no collateral and is considered unsecured; in case of bankruptcy, the debenture holder is considered a general creditor. A debenture can be traded, and the term is often interchangeable with a bond. Debentures issued by governments are considered risk-free. See also: Treasury security.
A debenture is an unsecured bond. Most bonds issued by corporations are debentures, which are backed by their reputation rather than by any collateral, such as the company’s buildings or its inventory.
Although debentures sound riskier than secured bonds, they aren’t when they’re issued by well-established companies with good credit ratings. Debentures are long-term Debt Instrument issued by governments and big institutions for the purpose of raising funds. Debentures have 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. Nonetheless, a Debenture is backed by all the assets which have not been pledged otherwise. Normally, Debentures are referred to as freely 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 issue is similar to the case of a loan. In practice, the differentiation between a Debenture and a Bond is not observed every time. In some cases, Bonds are also termed as Debentures and vice-versa. If a bankruptcy occurs, Debenture holders are treated as general creditors.
The Debenture issue has a substantial advantage from issuing a Debenture because the particular assets are kept without any encumbrances so that the option is open for issuing them in future for financing purposes. Although there are no pledges of specific assets, debenture holders are still considered a creditor in bankruptcy occurs. Debentures are usually used by governments and large companies. They can be a great tool to raise funds and still leave specific assets free to be used for financing in the future.
Another type of debenture is known as a convertible debenture. Instead of receiving payment when the debenture matures, the buyer of the debenture can chose to take stock in the company. With convertible debentures, the cost of borrowing is lower for the seller since the buyer has the option of converting it into stock.
Debentures are tools used by large companies to raise capital for their projects and operations. This is known as a debt offering since the company literally goes into debt to the investors until the price of the debenture is paid back, plus interest, or until it is converted into stock. The company must record this debt in their balance sheet. If bankruptcy occurs, the debenture holders are considered creditors and must be paid back by the company’s remaining assets. Debentures are a way for companies to raise capital without having to use their assets or give up ownership in their company. This leaves their assets free to do other things to generate capital for the business.
Debentures close on the 1st and 15th of every month and the process generally takes 6-8 weeks assuming that all documentation is provided in a timely manner. See similar questions…
The Debenture Stock is secured by a charge to an independent Trustee Company, who holds a first ranking charge over the mortgages and other assets of Balanced Securities Limited including $1 million paid up capital and retained earnings of the company. Loans made by Balanced Securities Limited are on first mortgage only, and are advanced up to 67% of the value of a property. See similar questions…
Approximately 30 days prior to the maturity date of your investment we will advise you of the current interest rates applicable for new terms. If you wish to change the term or withdraw all or part of your investment at this time, you should advise us in writing at least 7 days prior to the maturity date. If you do nothing we will automatically roll over your debenture investment for the same term as previously held at the applicable interest rate. See similar questions…
WDH is the trading name for Debentures Ltd., a sole purpose company set up for the benefit of Wimbledon Debenture Ticket Holders. Our principal activity is the marketing and brokering the sale of Debenture Tickets on behalf of the Debenture Holders. See similar questions…
The rate of interest is based on the 10-year Treasury rate plus a market-driven spread, currently about 65-75 basis points. See similar questions…
Any participating borrower interested in long-term financing may contact Infrastructure Ontario to begin the debenture process. The borrower will then be provided with an offer letter that describes the detailed steps necessary to complete the debenture process. Please contact Wendy Citrigno at (416) 326-7812 or call Infrastructure Ontario toll free at 1-800-230-0937 to begin the debenture process. See similar questions…
Debenture Stock investments must be treated as a fixed term investment. Similar to first mortgage investments, Debenture Stock investments can be for a relatively short term and are generally for periods from one to three years. See similar questions…
Interest will commence from the date of acceptance of your investment eliminating the waiting period prior to a first mortgage investment becoming available. With first mortgage investments there was usually a “down time” between when a mortgage was repaid and funds were placed in an at call account pending re-investment in a new mortgage. This “down time” has now been eliminated for investors. There are no entry, account or collection fees and all interest rates quoted are the net return. See similar questions…
SBICs are eligible to use LMI Debentures, which are deferred interest debentures that are issued at a discount and require no interest payments or SBA annual charge for the first five years. LMI Debentures are available in 5 and 10 year maturities. The use of LMI Debentures is restricted to LMI qualified investments.
A LOT more people should know about debentures than do. Simply put, a debenture is a bond that instead of being secured by property or capital asset is rather secured only by the “general credit-worthiness” of the issuer. Hmmm… that’s a bit of a mouthful, so let me break it down…
If a bond defaults, the bond-holders are entitled to the liquidated proceeds of the property or equipment that was bought with the money that was given to the bond issuer in exchange for the bond. Think of it like a mortgage – if you default on your mortgage, the bank can sell your house to recoup it’s money.
A debenture is just like a bond in all ways except for what is pledged as security for the investment. With a bond, the security is property. With a debenture, the security is only the “credit-worthiness” of the issuer. So if they have a AAA credit rating, they are in excellent financial shape. But if they default, or go under, the debenture holder has no property rights per se.
So, why buy a debenture? As you are probably becoming more conscious of: since the debenture is slightly riskier, a rational investor would expect a higher rate of interest than with a bond which has more “security”. So if you are looking at buying a bond from Company XYZ, you will see that if they offer debentures as well, they offer a higher rate of interest than the bond (of comparative length).
Debenture is a general term that loosely refers to debt, but can also refer to more specific things such as the debt itself, the document that details the debt, or a type of bond or security issue provided by a company for a debt.
There are two types of debentures used in finance by corporations or companies who wish to raise capital. A debenture is bought by an individual who is repaid at a schedule date and is also entitled to the interest incurred. The first type is an unsecure debenture wherein the person who has bought the debenture is generally considered a creditor. Ergo, if the entity that has sold the debenture has gone into bankruptcy, the entity is not immediately obliged to repay those who have bought the debenture. The second type of debenture is secure in that those who buy debentures are assured of repayment no matter what the outcome is.
An unsecure debenture is usually issued by corporations or government entities that have had little history of defaulting on their repayments. Thus, there are those who prefer to invest in this type of debenture since it is more likely that repayment will be done.
Another classification of debentures involves the type of repayment given. A convertible debenture is given in the form of cash or stock as opposed to nonconvertible debenture, which may be in the form of an asset.
A debenture may also be commonly referred to as an agreement of debt between 2 parties. It is considered a contract between 2 parties that provides information with regards to the parties involved and the terms of the loan.
- Davis, J.S. (1917). Essays in the Earlier History of American Corporations (vols. 1–2 ed.). Cambridge, MA: Harvard University Press.
- Ekelund, R.B. & Tollison, R.D. (1980). “Mercantilist origins of the corporation”. Bell Journal of Economics (The RAND Corporation) 11 (2): 715–720. doi:10.2307/3003390. http://jstor.org/stable/3003390.
- Fisher, F. J. (1933). “Some experiments in company organization in the early seventeenth century”. Economic History Review (Blackwell Publishing) 4 (2): 177–194. doi:10.2307/2590601. http://jstor.org/stable/2590601.
- Freedman, C.E. (1979). Joint-Stock Enterprise in France 1807–1867: From Privileged Company to Modern Corporation. Chapel Hill: University of North Carolina Press.
- Hunt, B.C. (1936). The Development of the Business Corporation in England, 1800–1867. Cambridge, MA: Harvard University Press.
- Lobban, M. (1996). “Corporate identity and limited liability in France and England 1825-67”. Anglo-American Law Review 25: 397.
- Mayson, S.W et al. (2005). Mayson, French & Ryan on Company Law (22nd ed.). London: Oxford University Press. ISBN 0-19-928531-4.
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