Glossary - Debenture
A debenture is a type of debt instrument that is not secured by physical assets or collateral. Issued by corporations and government entities, debentures are backed only by the general creditworthiness and reputation of the issuer. They are a method for entities to raise capital and often come with a fixed interest rate and maturity date.
Also known as
- Unsecured Bond
- Unsecured Debt
Use cases examples
- Corporate Financial Statements: The company's financial statements included a line item for 'outstanding debentures' amounting to $1 million, representing unsecured debt issued last year with a 5% interest rate.
- Government Bond Issuance Announcement: The government's treasury department announced the issuance of new debentures worth $500 million to fund infrastructure projects, specifying they are unsecured and bear an interest rate of 4%.
Considerations for investors
- Evaluating the creditworthiness of the issuer to assess the risk of default, as debentures are not backed by specific assets.
- Considering the interest rate offered in comparison to the market and inflation rates, to ensure an adequate return on investment.
Considerations for founders
- Understanding the impact of issuing debentures on the company's debt levels and interest obligations.
- Considering the creditworthiness of their company, as it directly affects the interest rates they might have to offer to attract investors.
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