Nepedia
Back to Discover
Fluent Reader
📖

Debenture

society Maturity 5-7 Next article →

A debenture is a tool used by large companies to borrow money. It is a medium- to long-term debt instrument. This means it is a way to borrow money for a while. The company agrees to pay a fixed rate of interest. This interest is extra money paid to the lender. A debenture acts like a certificate of a loan. It proves the company owes a specific amount of money.

How a debenture works can vary based on its rules. Some have a feature called convertibility. This lets a lender turn their loan into equity shares. Equity shares mean owning a small part of the company. Because this is a special advantage, these bonds often have lower interest rates. Other debentures are non-convertible and cannot be turned into shares. These regular debentures usually pay higher interest rates to the lender.

Finding a single definition for a debenture is quite hard. Even a famous English judge named Lord Lindley said he did not know the exact meaning. He noted that many different kinds of instruments are called debentures. In the United States, a debenture is often an unsecured corporate bond. This means there is no specific property to guarantee the repayment. In the United Kingdom, a debenture is usually secured.

Different places use different names and rules for these loans. In Asia, a loan secured by land is called a mortgage. A loan secured by other company assets is a debenture. If there is no security, it is called a note. In the U.S., corporations often issue bonds for about $1,000. Government bonds are often larger, around $5,000. Some companies use a sinking fund to pay back the value slowly. This helps protect the lender from risks like bankruptcy.

Debenture holders have specific rights and roles in a company. They can freely transfer their debentures to other people. However, they do not get to vote in general shareholder meetings. They can only vote on changes to their own rights. If a company fails to pay, it may face bankruptcy. In a bankruptcy, debenture holders get paid before stockholders do. Senior debentures are even paid before subordinate debentures.

361 words

Where will your curiosity go next?

Keep exploring at your chosen reading level.

More to explore

🔬 Go deeper

More advanced topics to explore

🪜 Step back

Simpler topics to build understanding

What is Nepedia?

A free, ad-free encyclopedia for children. Every article is written at five reading levels, so the same page works for a five-year-old and a fifteen-year-old — use the level switcher above to see this one change. No account needed to read.