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What is Debenture?

If you're familiar with the concept of debt, you must have come across the term debentures for sure.

Debenture is a long-term debt instrument which is generally not secured by specific property or collateral.

In investing terms, if a company requires funds but it doesn't want to raise its share capital, it can issue debentures. The difference here is unlike the shares, debentures are for a fixed period of time with fixed interest rates. Interest rates for debentures does not depend on the profitability or loss of a company.

So, think of a debenture as a loan which should be repaid on a specific date. Debentures are used by a company mainly to raise medium or long-term funds from the public.

Debenture holders are not considered as a part of a company, so they don't enjoy voting right like shareholders of a company do.

Debentures are backed by the reputation of the issuer. Debentures are also called unsecured loans.

Now you may wonder that how is this different from a loan? Because aren't we paying interest rates? Well, a primary advantage of a debenture is that they represent a relatively low-cost form of borrowing.

However, just like there's risk involved in every aspect of investing, the key disadvantage here is that debentures are usually placed towards the end when it comes to repayment. So, if the company goes bankrupt, the debenture holders are left unsecured.


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