What is Debenture? Advantage and Disadvantage of Debentures

What is debenture?

In corporate finance, a debenture is a medium-to long-term debt instrument used by large companies to borrow money, at a fixed rate of interest. In simple terms, A debenture is a marketable security (a type of investment) issued by a business or other organization to raise money for long-term activities and growth.

Debenture bonds are liabilities of the company because they represent debts that will have to be repaid in the future. Liabilities are shown on the balance sheet as either current liabilities or long-term liabilities. Debentures are considered safer investment vehicles compared to stocks because their value cannot be as easily manipulated as that of stocks.

Advantage of Debentures:

Debentures are debt instruments issued by the company that promises a fixed interest rate of the due date. Following are the some advantage of debentures:

  • Stable prices
  • Non-interference in management
  • Regular source of income
  • Secured investments.
  • Fixed return
  • Availability of funds

Disadvantages of Debentures:

The payment of interest and principal becomes a financial burden for the company in case of no profits. By holding a debenture, the lender loses their right to vote and take a share of company profits. These are the some point on disadvantage of debentures.

  • No voting right
  • Unsuitable for some companies
  • Liquidation of the company

What is the interest rate on debenture?

The interest rate on debenture is fixed by the company at the time of the first issue. 10% Debentures means the subordinated debentures issued by the ABC Company, due January 1, 2022, under an indenture dated as of January 1, 2010, between the Company and Bankers Trust Company, as trustee, and bearing an interest rate of 10 percent (10%) per annum.

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