Q:

What is a debenture?

A:

A debenture is type of a traditional loan, usually a long-term loan, that is borrowed by a company. There are usually different terms set out during the agreement including the interest, the loan amount, repayment terms, enforcement terms in case of a default and property provisions. Debentures differ from other ways of raising capital, such as bank loans, equity shares and bonds.

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There are two types of debentures, namely convertible and non-convertible debentures. Convertible debentures are considered hybrid securities that can be converted into equity shares. Investors prefer convertible debentures because they allow for conversion while companies like them due to their lower interest rates. Non-convertible debentures cannot be converted into equity shares thus making their interest rates very high.

Most debentures in the United States are usually unsecured but in other countries they are usually secured through the assets of the borrowing company. Debentures have a fixed interest rate, and the interest is paid prior to paying dividends to the shareholders. Investors who have debentures lack the privilege of voting during shareholders' meetings. The benefit that debentures have over other types of loans is the lower interest rates. Investors also have an effortless experience selling debentures in the stock market and have minimal risks compared to equities.

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