In simple words, Debenture denotes a deed or bond enclosing an acceptance of liability produced by a firm and imparting a responsibility to pay back the balance at a particular day or else at the preference of the firm also in the interim to reimburse the profits at a preset rate as well as at the period declared in the deed. In some countries, the word is used interchangeably with note, loan stock, or bond.

Characteristic of Debentures

Shareholders who fund in the deed of the firm are in no way the possessors of the firm.

Finances projected by the firm by means of bond are necessary to be paid back during the lifetime of the firm at the duration predetermined by the firm. By itself, debentures are not a resource of everlasting funds. Debentures can be well thought-out to be a continuing source.

In realistic conditions, debentures are normally tenable, to be precise; the firm proffers a few of the possessions as safety to the shareholders in debentures.

The company pays the return in the shape of interest. Interest Rate is preset; however, the alike can be liberally determined by the firm. The profit on the bond is due still if the business does not produce the profits.

Debentures as a source of raising long-term funds are very risky from company’s viewpoint. The hazard acknowledged by the company in case of debentures is dual. First, to give the interest at the predefined rate and at predefined time intervals irrespective of unavailability of earnings and second, to repay the principal amount of debentures during the lifetime of the firm.

Risk on the part of the investors is very less in case of debentures. The investors in debentures being the creditors of the firm, they cannot direct the dealings of the firm. As such, the debentures do not carry any voting rights. However, in the event of non-payment of interest or principal amount, they can interfere in the operations of the firm by taking legal action.

In financial terms, debentures prove to be an economical basis of funds from the company’s viewpoint.