Investor Trading Academy: Debentures

Definition

• A debenture is a promissory note or corporate bond.
• Backed by the reputation and integrity of the borrower and specific assets.
• Unsecured debenture: Known as a "bare" or "naked" debenture.
• Secured debenture: Known as a "mortgage debenture" when backed by a charge on specific property.

Characteristics

• A type of debt instrument without security from physical assets or collateral.
• Backed by general creditworthiness and reputation of the issuer.
• Commonly issued by both corporations and governments to secure capital.
• Documented legally through an indenture.

Risk and Security

• No collateral is associated with debentures.
• Buyers purchase debentures based on the belief in the issuer's ability to repay.

Examples

• Government Debentures: Include Treasury bonds (T-bonds) and Treasury bills (T-bills), considered risk-free.
  • Risk-free nature due to government's ability to print money or raise taxes to cover debts.