What is Debenture?

A debenture is a type of debt instrument that companies issue to gather funds from the public. When issuing debentures, a company borrows from investors and commits to paying a fixed interest rate over a set of time.  Many debentures are not secured by physical assets. Instead, they rely on the company’s creditworthiness and reputation for repayment. Firms turn to debentures to cover expansion needs, working capital, or key projects while keeping full ownership control. In this article, the debentures meaning, their features, types, and other key details are discussed. 

Features of Debentures 

The following are the features of debentures. 

1. Fixed Interest Payment: Debentures come with a set interest rate paid out regularly, such as every quarter or year. This setup gives investors a steady flow of income for the full term. 
2. Specified Maturity Date: The company pays back the principal amount to holders of each debenture on its designated maturity date.  
3. No Ownership Rights: The debt instrument holders possess only creditor rights which limit their ability to vote or make decisions about the company.  
4. Tradable Instrument: If debentures get listed on secondary markets their status changes to tradable instruments whose market value varies with interest rate movements and the company's operational results.  
5. Credit-Based Instrument: Unsecured versions rest on the issuer's financial health and credit score. 

Types of Debentures 

Types of debentures are: 

• Secured Debentures: These are tied to company assets as security. In case the issuer defaults, holders claim those assets first. 
• Unsecured Debentures: Without asset backing, these rely on the issuer's reputation and ability to pay. 
• Convertible Debentures: After a certain time, these can be converted into company equity shares under set rules. 
• Non-Convertible Debentures (NCDs): These are loans you give to a company that pay fixed interest and cannot be converted into shares. 
• Redeemable Debentures: These are repaid by the company on a pre-decided maturity date. 

Difference Between a Debenture and a Loan 

The difference between a debenture and a loan is explained below: 

Debenture 

• Funds are raised from multiple investors through public or private issuance. 
   
• Debentures may be listed and traded in the secondary market. 
   
• Issued through a formal offer document and subject to regulatory guidelines. 
   
• May be secured or unsecured depending on the structure. 
   
• Interest terms are standardised for all subscribers. 

Loan 

• Borrowed from a bank or financial institution, usually involving one lender. 
   
• Loans are not tradable in the market. 
   
• Based on a private loan agreement between borrower and lender. 
   
• Often secured by collateral as per agreement terms. 
   
• Interest rate and repayment terms are negotiated between the two parties. 

Advantages & Disadvantages of Debentures 

Following table explains the advantages and disadvantages of debentures 

What Are the Risk Factors While Investing in Debentures? 

The following are the risk factors while investing in debentures. 

• Credit Risk: The issuer may delay or default on interest or principal payments. 
• Interest Rate Risk: Debenture prices can fall when market interest rates rise. 
• Liquidity Risk: Some debentures may be hard to sell quickly due to low trading activity. 
• Inflation Risk: Fixed returns may lose value if inflation increases. 
• Market Risk: Prices of listed debentures can fluctuate before maturity. 

Conclusion 

Understanding what is debentures definition is crucial. Companies raise funds through debentures as a debt option with fixed interest over time. These stand apart from loans through open trading and wider investor reach. They may provide reliable returns yet hold risks tied to credit and rates. Investors should assess the issuer’s financial position and investment horizon before investing. Monitoring such fixed-income instruments through an online trading app can support better tracking and informed decision-making.