Debentures Explained
Debentures are a type of Debt Instrument, similar to a Bond, that companies issue in order to raise capital. Details of Debentures are documented in an indenture, which is a written agreement between the issuer and the holder. Companies pay investors interest for the term of the Debenture. At the end of the lending period, issuing companies may redeem the debentures at par, premium or at a discount.
Debentures are not secured by physical assets or collateral and typically provide higher rates of financial return than Government Bonds or bank interest rates. Interest is paid to investors whether or not the issuing company makes a profit. The investor is lending money to a business and a Debenture carries all the risks that this involves.
The following video discusses the accounting treatment of a debenture. Refer to the section in this book on financial assets at amortised or financial liabilities at amortised cost for more examples.
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