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- In a finance transaction, a debenture is a way for a borrower to grant a security interest in real property to a lender. It creates a promise to pay, a charge over the property and a floating charge over all present and future real and personal property of the borrower.
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What is a debenture & how does it work?
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What is a debenture & a security interest?
What is a debenture loan agreement?
A standard form debenture created by a company incorporated in England and Wales in favour of a single corporate lender. This standard document creates a mortgage over properties, fixed charges over a range of other assets and assignments by way of security over the benefit of contracts and insurance policies, together with a floating charge ...
In a finance transaction, a debenture is a way for a borrower to grant a security interest in real property to a lender. It creates a promise to pay, a charge over the property and a floating charge over all present and future real and personal property of the borrower.
- What Is A Debenture?
- Understanding Debentures
- Types of Debentures
- Features of A Debenture
- Pros and Cons of Debentures
- Debenture Risks to Investors
- Example of A Debenture
- The Bottom Line
A debenture is a type of bond or other debt instrument that is unsecured by collateral. Since debentures have no collateral backing, they must rely on the creditworthiness and reputation of the issuer for support. Both corporations and governments frequently issue debentures to raise capital or funds.
Similar to most bonds, debentures may pay periodic interest payments called coupon payments. Like other types of bonds, debentures are documented in an indenture. An indenture is a legal and binding contract between bond issuers and bondholders. The contract specifies features of a debt offering, such as the maturity date, the timing of interest or...
Registered vs. Bearer
When debts are issued as debentures, they may be registered to the issuer. In this case, the transfer or trading in these securities must be organized through a clearing facility that alerts the issuer to changes in ownership so that they can pay interest to the correct bondholder. A bearer debenture, in contrast, is not registered with the issuer. The owner (bearer) of the debenture is entitled to interest simply by holding the bond.
Redeemable vs. Irredeemable
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. Because of this, irredeemable debentures are also known as perpetual debentures.
Convertible vs. Nonconvertible
Convertible debenturesare bonds that can convert into equity shares of the issuing corporation after a specific period. Convertible debentures are hybrid financial products with the benefits of both debt and equity. Companies use debentures as fixed-rate loans and pay fixed interest payments. However, the holders of the debenture have the option of holding the loan until maturity and receiving the interest payments or converting the loan into equity shares. Convertible debentures are attracti...
When issuing a debenture, first a trust indenture must be drafted. The first trust is an agreement between the issuing corporation and the trustee that manages the interest of the investors.
Debentures are the most common form of long-term debt instruments issued by corporations. A company will issue these to raise capital for its growth and operations, and investors can enjoy regular interest payments that are relatively safer investments than a company's equity shares of stock. Debentures are unsecured bonds issued by corporations to...
Debenture holders may face inflationary risk.Here, the risk is that the debt's interest rate paid may not keep up with the rate of inflation. Inflation measures economy-based price increases. As an example, say inflation causes prices to increase by 3%. Should the debenture coupon pay at 2%, the holders may see a net loss, in real terms. Debentures...
An example of a government debenture would be the U.S. Treasury bond(T-bond). T-bonds help finance projects and fund day-to-day governmental operations. The U.S. Treasury Department issues these bonds during auctions held throughout the year. Some Treasury bonds trade in the secondary market. In the secondary market through a financial institution ...
Debentures are a common form of unsecured bonds issued by corporations and governments. In contrast to secured bonds, which are backed by collateral, unsecured bonds are relatively riskier since they do not offer any sort of backstop of assets if the issuer defaults: they rely solely on the creditworthiness of the issuer. Strictly speaking, a U.S. ...
A debenture is a loan agreement in writing between a borrower and a lender that is registered at Companies House. It gives the lender security over the borrower’s assets. Typically, a debenture is used by a bank, factoring company or invoice discounter to take security for their loans.
A debenture is a document that creates security over the whole or substantially the whole of a company’s assets. Typically a debenture creates a fixed charge over the assets of the company which are not disposed of in the ordinary course of business and a floating charge over the rest of the company’s undertaking.
In a corporate context, the Companies Act 2006 provides a broader interpretation of debenture and defines it as including " debenture stock, bonds and any other securities of a company, whether constituting a charge on the assets of the company or not" (section 738).
In a legal context, a debenture is a document between a lender and borrower that gives the lender security over some or all of a company’s assets. If the borrower defaults on the loan, the security rights allow the lender to take the borrower’s secured assets and sell them to satisfy their debt.
