To do so, it can issue debentures of $100 each (i.e., 10,000 debentures will be issued). For $1,000 debentures, only 1,000 debentures will be required for the loan of $1,000,000. Because these debts are not backed by any collateral, however, they are inherently riskier than secured debts. Therefore, these may carry relatively higher interest rates than otherwise similar bonds from the same issuer that are backed by collateral. Redeemable debentures clearly spell out the exact terms and date by which the issuer of the bond must repay their debt in full. Irredeemable (non-redeemable) debentures, on the other hand, do not hold the issuer liable to repay in full by a certain date.
Convertible vs. Nonconvertible
Nonconvertible debentures are traditional debentures that cannot be converted into equity of the issuing corporation. To compensate for the lack of convertibility investors are rewarded with a higher interest rate when compared to convertible debentures. When debts are issued as debentures, they may be registered to the issuer.
Debenture and loan are both forms of borrowing money, but they differ in certain aspects. A debenture is a long-term debt instrument issued by a company to raise funds, usually with a fixed interest rate and a specific maturity date. On the other hand, a loan is a financial arrangement between a borrower and a lender, where the borrower receives a specific amount of money and agrees to repay it with interest over a predetermined period. Loans can be secured or unsecured, depending on whether collateral is provided. A debenture is a type of bond that a government or corporation can use to raise capital. As with other bonds, those who invest in debentures loan the entity money and get it back with interest.
Maturity Date
The way that debenture stocks operate is nearly identical to preferred stock. Conversely, loans maintain the company’s ownership structure, devoid of equity participation. To make an informed choice, it’s essential to compare the total interest costs that will accrue over the repayment period. The main differences between shareholders and debenture holders are summarized in the table below. Secured debentures, also known as mortgage debentures, are backed by assets or collateral.
- Debentures come with either fixed or floating (variable) interest rates and pay interest payments, known as coupons, on a regular schedule.
- Eventually, the government will pay back each of the investors with interest.
- Because a debenture is an unsecured debt, the town doesn’t have to worry about putting up any collateral.
🤔 Understanding debentures
The articles difference between debenture and loan and research support materials available on this site are educational and are not intended to be investment or tax advice. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. For information pertaining to the registration status of 11 Financial, please contact the state securities regulators for those states in which 11 Financial maintains a registration filing. 11 Financial is a registered investment adviser located in Lufkin, Texas.
Private businesses and governments sometimes issue debt securities to raise additional capital. These debt instruments are called debentures whenever they are not secured by any form of collateral. A secured bond is backed by collateral, such as a property or equipment. An unsecured bond, like a debenture, doesn’t have any collateral backing it up. Investors rely only on the trustworthiness and credit rating of the company or government issuing the bond.
Certain complex options strategies carry additional risk, including the potential for losses that may exceed the original investment amount. An option-adjusted spread is the difference between the yield of a security that pays fixed interest payments and the current U.S. Treasury rates, which represents the rate of return on a risk-free investment. With a debenture, especially a fixed-rate one, your return doesn’t change depending on the company’s profits.