What is a Debenture? A Comprehensive Guide to Its Legal Definition

Q: Are debentures a safe investment?

Debentures are generally considered safer than stocks but carry risks, especially if the issuer faces financial difficulties.

Q: How are debentures taxed?

Interest earned on debentures is usually subject to income tax, similar to other forms of interest income.

Q: Can individuals issue debentures?

Typically, only corporations or certain types of organizations can issue debentures.

Q: What happens if a company defaults on its debenture?

If a company defaults, debenture holders may only receive payment after secured creditors are paid in the event of liquidation.

Definition & Meaning

A debenture is a type of debt instrument that allows the holder to receive interest and principal payments from the issuer. It is typically an unsecured, long-term financial obligation, meaning it is not backed by specific assets but rather by the overall creditworthiness of the issuer. When a company issues a debenture, it agrees to pay a fixed interest rate annually until the maturity date, at which point the principal amount is repaid. Debentures are often considered safer than stocks or general bonds because they are backed by the issuer's credit rather than specific collateral.

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Legal Use & context

Debentures are commonly used in corporate finance and investment law. They serve as a means for companies to raise capital without giving up equity. Legal professionals may encounter debentures in various contexts, including mergers and acquisitions, bankruptcy proceedings, and securities regulation. Users can manage debenture-related documents and agreements using legal templates available through platforms like US Legal Forms, which are drafted by qualified attorneys.

Key legal elements

Real-world examples

Here are a couple of examples of abatement:

Example 1: A corporation issues a debenture to raise $1 million for expansion. Investors receive a 5% annual interest payment until the debenture matures in ten years, at which point they are repaid the principal amount.

Example 2: A startup issues debentures to finance its operations. The debentures are unsecured, meaning that if the company fails, the investors will be repaid only after secured creditors have been paid (hypothetical example).

Relevant laws & statutes

According to 13 CFR 108.50, debentures are defined as "debt obligations issued by NMVC companies pursuant to section 355 of the Act and held or guaranteed by SBA." This statute outlines the legal framework for certain types of debentures in the context of small business assistance.

Comparison with related terms

Term	Definition	Key Differences
Bond	A debt security issued by a corporation or government.	Debentures are unsecured; bonds may be secured by specific assets.
Stock	Equity ownership in a company.	Debentures represent debt, while stock represents ownership.
Loan	A sum of money borrowed that is expected to be paid back with interest.	Debentures are formal securities, while loans may not be.

Common misunderstandings

What to do if this term applies to you

If you are considering investing in debentures or issuing them as a company, it's important to understand the terms and risks involved. You can explore ready-to-use legal forms on US Legal Forms to create or review debenture agreements. If you find the process complex or have specific legal questions, consulting a legal professional is advisable.

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Quick facts

Typical term: Five to thirty years
Interest rates: Usually fixed
Risk level: Generally lower than stocks
Repayment: At maturity, principal amount is returned

Key takeaways

Frequently asked questions

What is the difference between a debenture and a bond?

A debenture is typically unsecured, while a bond may be secured by specific assets.