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Definition: Debenture

It is a non-collateral instrument of debt. It is a long term source of finance for the company.

Debentures are freely transferable by the holder and can be traded on the stock markets also. The total debt required to finance the company’s current needs is divided into debentures and then issued in the market. For example if a company wants to raise a debt of Rs. 5,00,000 then it can issue 5000 debentures of Rs. 100 each.

Fixed amount of coupon payments are made on the debentures. These debentures may be issued at par, below par or at a premium by the company. This term is sometimes interchangeably used with BOND as well. The debentures are generally backed by the floating charge on the assets of the company.

The debentures can be classified in general into 2 categories:

  • Convertible debentures
  • Non-Convertible debentures

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