Introduction to Debentures

• These are loan stocks that are issued to the company.
• A debenture is simply a document or certificates that acknowledges said loan.
• Debentures are creditors to the company and are, in the event of liquidation,
• the first to receive their monies.
• They usually earn a fixed rate of interest and are typically redeemable.
• Some debentures are convertible.

Types of Debentures

Convertible debentures

• these can be converted into one form of stock or another for example into ordinary shares,
• at the discretion of the of the debenture holder at a predetermined future date.
• For example Debentures can have the option to be converted into either Ordinary or Preference shares after a certain date.

Naked debentures

• also known as simple debentures, these are issued without security since they are unsecured and not tied to any specific asset within the company.
• These debentures are considered insecure in the event of liquidation since they have to wait in line with other creditors although they receive the money before the shareholders.

Floating debentures 

• such debentures are secured by floating amounts on all the assets of the company.
• Such assets may be Debtors, Stock etc.
• These debentures are typically secured on the current assets of the company.

Mortgage debentures

• these debentures are secured on the more permanent assets of the company such as Plant Property and Equipment or Buildings.

To access more topics go to the O Level Business Notes page.