A debenture is a type of debt instrument unsecured or secured by collateral. Debentures rely on the creditworthiness and reputation of the issuer for support. Both corporations and governments frequently issue debentures to raise capital or funds. Debentures may be interest-paying or cumulative where the principal invested and interest over it is paid by the issuer at the end of the tenor of the debentures.
Debentures can Convertable or Non-Convertible
Convertable Debetures gives the right to the debenture holder the right to convert the debt into equity shares of the company. Where in case of Non- convertible debentures no such right is vested with the debenture holder.
Features of a Debenture
Interest Rate – That a issuer promises to pay on its debentures.
Credit Rating – A company’s credit rating impacts the rate of interest at which it can raise funds through the means of debentures.
Maturity Date – Date at which the company much payback the money to the debenture holders the principal along with any interest accrued.
Debentures, bonds and other debt instruments of various issuers can be used to generate a portion of the periodic income that will form part of the retiral income. The choice of the bonds should be made with care to reduce the risk of default by the issuer. The interest earned will depend upon the market rates at the time of issue and the default risk associated with the borrower. The interest is typically paid annually or semi-annually and is taxed in the hands of the investor.