What are Debentures?
Debentures are like loans that investors give to companies or governments. When you buy a debenture, you’re lending them money for a certain time. In return, they promise to pay you back the money you lent, plus extra called interest. Unlike bonds, debentures aren’t backed by anything specific, so they rely only on the issuer’s promise to repay. They also pay out fixed interest payments regularly, just like bonds. But because they don’t have anything backing them up, debentures are usually riskier than bonds. This means they might offer higher interest rates to attract investors. People who invest in debentures are usually okay with taking more risks to potentially get more money back.
Key Features of Debentures:
- Loan Agreement: Debentures are like loans where investors lend money to companies or governments for a specific time.
- Repayment Promise: The issuer promises to pay back the borrowed money, along with extra money called interest, at a later date, usually when the debenture expires.
- Fixed Interest Payments: Debentures pay out fixed interest regularly, like once a year or every few months, giving investors a steady income.
- No Collateral: Debentures don’t have anything specific backing them up. So, if the issuer can’t pay back the money, investors might lose out, making them riskier than some other investments.
Difference between Bonds and Debentures
In finance, knowing about bonds and debentures is important for investors. Bonds and debentures are essential financial instruments used by governments, financial institutions, and corporations to raise capital. Bonds are usually safer because they have something valuable backing them up. On the other hand, debentures are riskier but might give you more money. Understanding these things can help you make smart choices when building your investment plan.