A type of debt instrument that is not secured by physical asset or collateral, Debentures is backed only by the general creditworthiness and reputation of the issuer. Both corporations and governments frequently issue this type of bond in order to secure capital. Like other types of bonds, debentures are documented in an indenture.

Debentures have no collateral. Bond buyers generally purchase debentures based on the belief that the bond issuer is unlikely to default on the repayment. An example of a government debenture would be any government-issued Treasury bond (T-bond) or Treasury bill (T-bill). T-bonds and T-bills are generally considered risk-free because governments, at worst, can print off more money or raise taxes to pay these type of debts

A debenture is a document that either creates a debt or acknowledges it, and it is a debt without collateral. In corporate finance, the term is used for a medium- to long-term debt instrument used by large companies to borrow money. In some countries, the term is used interchangeably with bond, loan stock or note.

A debenture is thus like a certificate of a loan or a loan bond evidencing the fact that the company is liable to pay a specified amount with interest and although the money raised by the debentures becomes a part of the company’s capital structure, it does not become share capital. Senior debentures get paid before subordinated debentures, and there are varying rates of risk and payoff for these categories.

There are two types of debentures:

1. Convertible debentures

Which are convertible bonds or bonds that can be changed over into value shares of the issuing organization after a foreordained timeframe? “Convertibility” is a component that companies may add to the bonds they issue to make them more appealing to purchasers. At the end of the day, it is a unique element that a corporate security may convey. As a consequence of the favorable position, a purchaser gets from the capacity to change over, convertible securities regularly have brought down financing costs than non-convertible corporate securities.

2. Non-convertible debentures

Which are just normal debentures, can’t be changed over into value shares of the at risk organization. They are debentures without the convertibility include joined to them. Subsequently, they as a rule convey higher loan fees than their convertible partners.