Debentures

Debentures are unsecured bonds that are not ensured by any specific physical assets that a company may own (such as an office building or other collateral). Debentures are backed only by the belief of repayment and creditworthiness of the issuer. The associated repayment terms make Debentures a considerably risky investment compared to other types of bonds. Investors often purchase Debentures based on one’s likeliness of default and individual creditworthiness. In the case of bankruptcy, the holders of Debentures will have claim to any unsecured assets that the company may have. Debenture holders will also be treated as general creditors. Debentures that are issued by the government (such as treasury bills and treasury bonds) are considered to be virtually risk free; This is because the Debentures that are issued by the government are highly unlikely to be defaulted on and governments can always raise money through taxes if necessary. Often times, companies and government agencies issue Debentures to raise money for needed capital. Debentures are usually issued by companies who have very high creditworthiness and impressive amounts of cash flow. As an exception, companies who have all of their assets tied up and have no other choice are sometimes subject to issue Debentures for investment purposes. To offset risk, typically the riskier the Debenture, the higher interest it will have. Some Debentures also feature a convertibility option, that allows them to be converted directly into a company’s stock.