What Are Debenture Bonds

A debenture bond is a document that does one of the two things; acknowledges debts or creates a debt. In certain areas the term is used to refer to long term and medium term debt often used by large corporate to get loans from lending institutions. The document is referred to by various names depending on which country or state one resides in such as loan stock or note. The document which may be in the form of a certificate is evidence that the body or party holding it is liable to pay a specific amount of money which should be paid at an agreed interest. Though the finances raised in debentures is considered as part of the company capital it never translates in to shares.

The party holding the debenture bond can always transfer, however because the document is not a share capital the party holding it does not possess voting rights during the company’s annual meetings when shareholders meet. At times they have separate meetings to vote or deliberate on issues that affect the debentures. Debenture holders are paid interest on a regular basis by the company against its profit. Debentures have certain characteristics which include being a movable asses, contains a specific date when it’s supposed to be redeemed, the interest and principal repayments are tp be paid on those dates specifically. They also may create a charge on the company assess or not apart from being issued as a certificate by the company in order to show its indebtness.

Debenture bonds may be secured or unsecured, when they are unsecured it means that the bond does not have a specific line of income or property to guarantee repayment of the principal amount once the bond has reached the due date also referred to as maturity .Different companies have various requirements under which the bonds are issued. Some states prefer secured bonds while others allow both the secured bonds and unsecured bonds. The advantage of secured bonds is that they give the debtor more priority and security should they fall in to bankruptcy unlike the unsecured bonds. In some countries especially in Asia when the bond is secured by over land the document is referred to as mortgage, however when secured by other assess its known as a debenture. In such countries if the bond is not secured it’s known as unsecured deposit note.

Debenture bonds may be either convertible or unconvertible, convertible bonds can be turned in to shares by the company that issued the certificates after some time. Convertible bonds have their advantages and disadvantages especially when it comes to interest rates paid to each of them. On the other hand there are bonds that are considered unconvertible debentures. These cannot be turned in to equity shares of the company that is liable because they don’t contain features that enable them to be converted. Due to the risk that accompanies such bonds they often have higher interest rates unlike their counterparts which are convertible and hence provide more options to the holder.