What is a Debenture?

A debenture is a bond issued with no collateral. Instead, investors rely upon the general creditworthiness and reputation of the issuing entity to obtain a return of their investment plus interest income. If the issuer of a debenture were to default, investors would be placed at the level of general creditors in terms of their ability to recover funds from the issuer. An entity that issues debentures and has lower credit quality can expect to pay a high interest rate, to compensate investors for the increased risk associated with these instruments.

Who Issues Debentures?

Debentures are normally only issued by the largest and most creditworthy of debt issuers, whose ability to repay is beyond question. For example, national governments can issue debentures, because they can raise taxes to pay off their obligations. These issuers use debentures in order to preserve their assets for use as collateral for more senior forms of debt. Further, they may see no need to use their assets as collateral, if investors are willing to pay for sufficiently low interest rates on any debentures issued.