What is a debenture in financial terms?

A debenture refers to a type of long-term debt instrument that is not secured by physical assets or collateral but instead relies solely on the creditworthiness and reputation of the issuer. This means that investors in debentures are essentially lending money to the issuer with the expectation that it will be repaid along with interest at a specified date in the future.

When debentures are issued, they usually come with specific terms regarding the interest rate and maturity date, making them a fixed-income investment. They are typically used by corporations and governments to raise capital for various purposes. Since they are unsecured, the risk associated with debentures can be higher than secured bonds, but they often attract investors due to potentially higher yields and the credibility of a well-established issuer.

In the context of financial instruments, understanding the nature of a debenture as an unsecured bond is essential, especially when distinguishing it from other forms of debt or equity. This clarity becomes important, particularly when assessing risk and investment strategy.