Q:

What are the advantages and disadvantages of debentures?

A:

Debentures pay higher rates than secured debts, but there is a risk that an issuer will be unable to pay the investor, according to TheFreeDictionary. Debentures are typically issued by companies with good standing, but these bonds are unsecured and have no collateral.

TheFreeDictionary further notes that government debentures in particular are risk-free. For instance, governments can print more money or raise taxes if there is trouble repaying the debts. Subordinated debentures are bonds that fall below any debts incurred by a company. If a company is liquidated, all debts must be settled before payment is issued to the investor; however, these types of bonds carry even higher interest rates. Converted debenture is another type of bond that can be converted into stock, according to Investopedia.

TheFreeDictionary adds that a major drawback is the fact that the investor then becomes a creditor until the debt is paid in full. Moneycontrol notes that an issuer may not pay the bond on time. Debentures rely solely on the reputation and credit rating of that particular company and are detailed in a contract where it is specified that the issuer promises to pay the interest and principal on time. Investopedia mentions another disadvantage with regards to convertible bonds since the issuer pays a lower interest rate if there is a convertible option on the bond.

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