Debenture is a type of debt security that is backed only by the credit of the issuing company, and not by any form of collateral. This means that investors take on more risk when investing in debt securities issued by a company, as their debt is not secured by specific tangible assets. Debentures are typically issued by governments and large corporations to finance large-scale projects, and can be issued in either domestic currency or foreign currency.
Characteristics and Pros of Debentures
Debentures normally provide a fixed rate of return, determined by the issuer. As such, they provide a reliable and predictable income stream for investors who purchase them. In addition, the interest payments made on a debenture are normally tax deductible, which makes them attractive investments for individuals and companies alike. Whether an individual or company chooses to invest in debentures is up to them; however, the benefits of doing so should be carefully weighed and considered before making a decision.
Function of a Debenture & Repayment
Debentures are used as a method of financing for individuals, as well as corporations and governments. The issuing company receives the money raised from the sale of the debentures, which they can then use to finance a project or purchase an asset. The issuing company then repays this loan plus interest over the life of the debenture, in regular payment at predetermined intervals.
Examples of Debentures
Modern examples of debentures can be found in many industries. For example, banks often issue debentures to raise funds for large projects, which are purchased by investors. Another example is when companies issue convertible debentures, which are debentures that can be converted to a specified number of shares of the company, or vice versa, depending on the terms of the agreement. Both of these examples demonstrate how debentures can be used as a method of financing for companies, as well as a way to raise funds for investors.
Conclusion
In conclusion, debentures provide companies and investors alike a way to access capital. Companies can finance large-scale projects, and investors can purchase debt securities backed solely by the credit of the issuing company. Although the risks associated with debentures are higher than those associated with other debt securities, the potential rewards of investing in debentures make them a viable option for both individuals and corporations.