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Debenture

A debenture is a long-term debt security that a company or government issues to borrow money, backed only by the issuer's general creditworthiness rather than by specific pledged assets.

What Is a Debenture?

A debenture is a type of bond-like debt instrument through which an organization borrows money from investors and promises to repay it with interest on a set schedule. The defining feature of a typical debenture is that it is unsecured. It is not tied to any particular asset, so if the issuer fails to pay, the holder has a general claim against the issuer rather than a claim on a specific piece of property.

In the United States, "debenture" usually refers to an unsecured bond. Usage differs in other countries. In the United Kingdom, for example, a debenture can refer to a legal document that creates a charge over a company's assets, so the meaning depends on context and jurisdiction.

How Debentures Work

Investors who buy a debenture lend money to the issuer for a fixed term. In return, they receive periodic interest payments, often called coupons, and the original principal is repaid at maturity. Because no specific collateral backs the loan, investors rely heavily on the issuer's financial strength and its record of meeting its obligations.

If the issuer goes bankrupt, debenture holders are generally paid after secured debt holders, who have collateral to recover from. They usually rank ahead of equity holders, though. Some debentures are subordinated debt, which ranks below other unsecured debt and therefore carries more risk. Others are convertible bond|convertible, meaning the holder can exchange them for a set number of the issuer's shares, which can add potential upside while changing how the security behaves.

Why It Matters to Investors

Debentures let investors earn fixed income from companies without a pledged asset. The main consideration is credit risk. Since there is no collateral, the value depends on the issuer's ability to pay. Investors often check the issuer's credit rating and compare the stated interest rate with the bond yield available on similar securities. Prices also move as market interest rates change, so an investor who sells before maturity may receive more or less than the original principal.

Updated October 26, 2026. For general education only; not financial, tax or legal advice.

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Related Terms

Bond

A bond is a loan that an investor makes to a borrower, such as a government or company, in exchange for regular interest payments and the return of the principal at a set maturity date.

Equity

Equity is an ownership interest in a company, typically held as shares of stock, that entitles the holder to a share of the company's profits and residual assets.

Subordinated Debt

Subordinated debt is a loan or bond that ranks below other debts of the same borrower, so its holders are repaid only after senior creditors in a default or liquidation.

Credit Rating

A credit rating is an independent assessment, usually expressed as a letter grade, of how likely a borrower is to repay its debt in full and on time.

Bond Yield

A bond yield is the annual return an investor earns from holding a bond, expressed as a percentage of its price, reflecting coupon income and any gain or loss relative to the amount paid.

Unsecured Debt

Unsecured debt is money borrowed without pledging any specific asset as collateral, so the lender relies on the borrower's promise and creditworthiness to get repaid.

Convertible Bond

A convertible bond is a debt security that the holder can exchange for a set number of the issuing company's shares, combining features of a bond and a stock.

Coupon Rate

A coupon rate is the fixed annual interest a bond pays, stated as a percentage of its face value. It determines the periodic coupon payments the bondholder receives until maturity.