What is a Debenture Bond?

A debenture bond is a bond that is not secured by any assets of the issuer. Instead, the bond is only backed by the reputation and integrity of the issuer. This type of bond typically carries a higher rate of interest than a secured bond, to compensate investors for the increased risk of not having their funds repaid. If the issuer defaults on these bonds, then investors are classified as general creditors of the issuer, which lowers the probability of their being paid in the event of the issuer’s bankruptcy.

Characteristics of a Debenture Bond

Here are the key characteristics of a debenture bond:

Unsecured. Debenture bonds are not backed by physical collateral like property or equipment. Instead, they rely on the issuer's creditworthiness, making the issuer's financial health critical for investors.
Fixed interest rate. Debenture bonds typically offer a fixed interest rate.
Interest payments. Debenture holders receive periodic interest payments, which are usually higher than the return on secured bonds due to the higher risk involved.
Repayment priority. In case of liquidation or bankruptcy, debenture holders are paid before equity shareholders but after secured debt holders.
Duration. Debentures are usually issued for a long-term duration, often spanning several years.
Risk level. Debentures carry a higher risk compared to secured bonds because they are not backed by specific assets.
Transferability. Debenture bonds are often traded in secondary markets, offering liquidity to investors.

Who Issues Debenture Bonds?

Debenture bonds are typically issued by large corporations and governments with excellent credit ratings. Investors are less concerned about these entities defaulting on their payments.