Debentures – What are they?

Debentures are fixed-interest securities or debt securities on which issues by companies that pay interest at a fixed rate and for a specific term. Investors buy debentures for a source of regular interest income. Generally, the level of income paid on debentures is higher than the rate paid on cash investments because of the longer term of the investment.

Other forms of debt securities include government bonds (state and federal), semi-government bonds (from government-owned corporations), and convertible notes (from companies).

Government policy, interest rate levels, inflation and the credit rating of the bond issuer can have major impacts on the returns from these types of investments including debentures. The length of time that the security is issued generally varies from 12 months to 10 years, however, like bonds, it is possible to buy and sell existing debentures in a secondary market.

Debenture holders are creditors of the company. In the event of liquidation debenture holders have a preferential claim on the assets to retrieve their invested capital.