A debenture is a financial debt instrument, it is the certificate issued by a company to the public or individuals showing that the company owes the holders. It is also called certificate or written acknowledgement of indebtedness by a company which has terms and conditions.
Debenture can also be defined as a loan capital with a specific rate of interest. A debenture holder is a creditor to the company and the holder receives interest on his capital if the company makes a profit or loss. The time until the final principal and interest payments are due to holders of debenture is called Maturity time.
Types of Debentures:
(1) Mortgage Debentures:
Mortgage Debentures are debentures that are secured on the company’s property or fixed assets. This means that in the case of liquidation or the company is declared bankrupt, the holders of these debentures are entitled to part of the firm’s property in exchange for their loans. The mortgage debentures are entitled to the money realized from the sale of the company property.
(2) Simple or Floating Debentures:
The holder is only entitled to a fixed rate of interest whether the company makes a profit or loss. They are the opposite of mortgage debentures where there is no charge created on the company’s property or assets. The debenture is described as naked or simple because there is no security for the debenture.
(3) Redeemable Debenture:
These are debentures that the company agrees to redeem on or repay, on or before the fixed date of repaying the loans.
(4) Irredeemable Debenture:
Irredeemable Debenture is repayable only in the event of some specified contingency (special condition) such as the winding up of the company. It cannot be cashed at any time and is bought solely for the interest payment. They do not have a fixed date for their repayment.
(5) Secured Debentures:
These types are holders whose repayment is certain through the provision of collateral security provided by the borrower.