Debenture is an unsecured debt backed only by the company, not by any collateral. Although there are no pledges of specific assets, debenture holders are still considered creditors if bankruptcy occurs. Debentures are usually used by governments and large companies. They can be a great tool to raise funds and still leave specific assets free to be used for financing in the future.
Another type of debenture is known as a convertible debenture. Instead of receiving payment when the debenture matures, the buyer of the debenture can chose to take stock in the company. With convertible debentures, the cost of borrowing is lower for the seller since the buyer has the option of converting it into stock.
Debentures are tools used by large companies to raise capital for their projects and operations. This is known as a debt offering since the company literally goes into debt to the investors until the price of the debenture is paid back, plus interest, or until it is converted into stock. The company must record this debt in their balance sheet. If bankruptcy occurs, the debenture holders are considered creditors and must be paid back by the companies remaining assets. Debentures are a way for companies to raise capital without having to use their assets or give up ownership in their company. This leaves their assets free to do other things to generate capital for the business.
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