Definition
The term debenture bond refers to debt issued by a company that is not secured by collateral. Debenture bonds are a source of capital and would appear as liabilities of the company on the balance sheet.
Explanation
Also known as certificates of indebtedness, bond debentures are oftentimes used by large companies to raise money. Unlike mortgage bonds, which are backed by physical assets, debentures are unsecured loans. Perhaps the most commonly issued debenture is Treasury Bills, or T-Bills, which are issued by the federal government.
The value of a debenture to investors relies solely on the perceived creditworthiness of the issuing company. For example, a security issued by a company with a bond rating of AAA would be deemed a relatively safe investment.
Within this category of investments, there is also a prescribed payment structure. Senior debentures are paid before subordinate, or junior, securities and the risk of non-payment would increase as subordination increases. For this reason, subordinate debentures would also require the payment of higher interest rates than more senior debt.
Debentures can also be subdivided into two broad categories:
Convertible: securities that can be converted to shares of the company's common stock after a pre-determined period of time.
Non-Convertible: securities that do not contain a convertibility feature.
The convertibility feature of a debenture bond is attractive to investors. Therefore, convertible securities will carry a lower interest rate than their non-convertible equivalent.
Related Terms
- The financial accounting term working capital is used to describe the excess of current assets when compared to current liabilities. The relative size of a company's working capital is an indication of the short-term financial strength of the company.
Moneyzine EditorNovember 6th, 2024 .png)
The financial accounting term liability is used to describe the debt of a corporation that results from a transaction involving the transfer of an asset or the provision of a service. Liabilities are reported on a company's balance sheet.Moneyzine EditorNovember 6th, 2024
Also known as a statement of financial position, the balance sheet is used to show the financial health of a company at a particular point in time. The balance sheet consists of assets, liabilities, and owner's equity in the company. It is one of the four key financial statements issued by public companies.Moneyzine EditorNovember 6th, 2024
The financial accounting term bond sinking fund is used to describe cash that is set aside by a company, which is to be used to repay money owed to bondholders. A bond sinking fund is typically overseen by a trustee, who is responsible for the repurchasing of maturing bonds on the open market.Moneyzine EditorJanuary 9th, 2024
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