What is a debenture?

A debenture is typically understood as an unsecured bond, meaning it is not backed by any specific collateral. This distinguishes it from other forms of debt instruments, such as secured bonds, which are guaranteed by specific assets.

In the context of corporate financing, a company issues debentures as a way to raise capital by borrowing from the public investors, promising to pay periodic interest payments and repay the principal at maturity. The lack of collateral means that debenture holders must rely on the creditworthiness and stability of the issuing entity for repayment. This can result in a higher risk compared to secured bonds, as there is less assurance that investors will recoup their investment in the event of the issuer's default.

The characteristics of debentures play a significant role in corporate financing and investing, as understanding the distinction between secured and unsecured debt is crucial for evaluating risks involved in investments.