Unsecured bonds or any other debt instruments with no collateral are called debentures. Due to the lack of collateral, debentures need to depend on the issuer’s creditworthiness or reputation for protection. Debentures are frequently issued by firms and governments to raise funds or invest in infrastructure.
Debentures, like other bonds, can have coupon payments, which are periodic interest payments. Debentures are recorded in an indenture, much as other forms of bonds. Bondholders and bond issuers enter into a legally enforceable contract that is referred to as an indenture. The contract outlines the maturity date, the timing of coupon payments or interest, the method of interest computation, and other aspects of a debt offering.
Debentures can be issued by both governments and corporations. Long-term bonds, or those having maturities of much more than ten years, are the most common type of bond issued by governments. These government bonds are considered low-risk investments since they are backed by the government issuer. Debentures can also be utilized by corporations as long-term loans.
Corporate debentures, on the other hand, are unsecured. Rather, they are only backed by the underlying firm’s creditworthiness and financial stability. These debt instruments have an interest rate associated with them and can be redeemed or repaid on a specific date. These periodic debt interest payments are often made before a corporation pays stock dividends to its shareholders.