Nonetheless, a Debenture is backed by all the assets which have not been pledged otherwise. Normally, Debentures are referred to as freely negotiable Debt Instruments. The Debenture holder functions as a lender to the issuer of the Debenture. In return, a specific rate of interest is paid to the Debenture holder by the Debenture issuer similar to the case of a loan.
In practice, the differentiation between a Debenture and a Bond is not observed every time. In some cases, Bonds are also termed as Debentures and vice-versa. If a bankruptcy occurs, Debenture holders are treated as general creditors.
The Debenture issuer has a substantial advantage from issuing a Debenture because the particular assets are kept without any encumbrances so that the option is open for issuing them in future for financing purposes.
Collaterals: Collaterals are assets or properties which are provided to secure a loan or any other type of credit. If there is a default, Collateral is a subject of seizure. Collateral is a type of security provided to the lender if there is a default on behalf of the borrower in repayment of loan. For instance, if a person takes a mortgage loan, the Collateral would be his house.
Debentures are categorized into the following types:
- Convertible Debentures: This is a debenture which can be converted into some other type of securities (for example stocks).
- Corporate Debentures: Corporate Debentures are Debentures issued by companies and they are insecure in nature.
- Bank Debentures: This type of Debentures is issued by banks.
- Government Debentures: These include Treasury bond (T-Bond) and Treasury bill (T-Bill) issued by the government. They are usually regarded as risk-free investments.
- Subordinated Debentures: This is a particular type of Debenture, which ranks below regular Debentures, senior debt, and in some instances below specific general creditors.
- Corporation Debentures: Corporation Debentures are issued by various corporations.
- Exchangeable Debentures: They are like Convertible Debentures, but this Debenture can only be converted to the common stock of a subsidiary company or affiliated company of the Debenture issuer.
There are some other types of Debentures such as Senior Debentures, Secured Debentures, Exchange Debentures, Secured Convertible Debentures, Convertible Senior Debentures, Unsecured Convertible Debentures, Subordinated Convertible Debentures, Senior Secured Convertible Debentures, Junior Subordinated Debentures, Senior Subordinated Debentures, and Senior Secured Debentures etc.