Debentures are a type of debt instrument that companies use to raise long-term capital. When you buy a debenture, you are essentially lending money to the company, and in return, the company promises to pay you regular interest (called a "coupon") and repay the principal at a later date.
Key Features of Debentures:
Unsecured: Typically not backed by physical assets (unlike secured loans).
Fixed Interest Rate: Investors earn regular, predetermined interest payments.
Redeemable: The principal is repaid at maturity.
Tradable: Can be bought and sold in the bond market.
Types of Debentures:
Convertible Debentures: Can be converted into equity shares after a specific period.
Non-convertible Debentures (NCDs): Cannot be converted into shares; only repay principal + interest.
Secured Debentures: Backed by the company’s assets.
Unsecured Debentures: Not backed by assets; higher risk.
In simple terms, debentures are like IOUs that large organizations issue to borrow money from investors.
