Loan Capital: Debentures - SS2 Accounting Lesson Note
Debenture is a type of debt instrument issued by a company or government entity to raise funds. It is essentially a loan that the issuer borrows from investors and promises to repay at a specified time, along with interest.
Features of debentures:
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Fixed interest rate: Debentures typically offer a fixed rate of interest, which is determined at the time of issuance and remains constant throughout the term of the debenture.
Maturity date: Debentures have a specific maturity date, which is the date on which the issuer must repay the principal amount of the debenture to the investor.
No ownership stake: Unlike shares, debentures do not give investors any ownership stake in the company or entity that issued them. Instead, they are simply a way for investors to lend money to the issuer.
Secured vs unsecured: Debentures can be secured or unsecured. Secured debentures are backed by some form of collateral, such as property or equipment, which the issuer pledges to the investor in case of default. Unsecured debentures, on the other hand, are not backed by collateral and are therefore considered riskier.
Priority in case of bankruptcy: In case of bankruptcy, debenture holders have priority over shareholders to recoup their investment. This is because debenture holders are considered creditors of the issuer, while shareholders are owners.
Transferability: Debentures are generally transferable, which means that investors can sell their debentures to other investors before they reach maturity.
Redemption: Some debentures may have a redemption feature, which allows the issuer to buy back the debentures from investors before their maturity date.