What is a Debenture?

by Investing School on May 17, 2010

A debenture is a document that either acknowledges a debt or creates it. The debt is usually medium to long-term and it is used by corporations to borrow money. There are some countries that refer to debenture as a bond, loan stock or note.

Debentures can usually be freely transferred by the debenture holder or lender of the money. Debenture holders, however, have no voting rights. And, the interest that is accrued and paid to the holder is a charge against the company’s profits and is reflected as such on its financial statements.

Debenture, however, means different things depending on the country in which you are doing business. In the United States, a debenture means an unsecured corporate bond. Or, more specifically, it is a bond that does not have a certain means of income or property to guarantee the repayment of the principal when the bond fully matures.

Conversely, in the United Kingdom, a debenture is secured most of the time. And, in Asia, the repayment of the debenture is secured by a charge over land then the debenture document is referred to as a mortgage.

In the United States, a corporation has an advantage when it issues debentures because it does not have to provide any assets or any income to guarantee repayment of the debt if the loan is defaulted on. So, the corporation will be able to use those assets or funds that would otherwise be allocated to fund debts in the event of default for other financial purposes.

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