A debenture bond is an investment product that can have aspects of both equities and bonds. Therefore, it is critical to understand which type of debenture you are purchasing and how that debenture works before acquiring one for your investment portfolio.
A debenture is an unsecured loan that you give to a corporation. Because the company secures the loan with property, income or equipment that guarantees the repayment of principal at maturity, debenture bonds typically pay a higher rate of interest. Debenture bonds are backed by backed by the full faith and credit of the issuing entity. Because of this, the owner of a debenture bond does have a claim on any of the entity's assets that are not already backing other debt instruments.
Convertible and Non-Convertible Debentures
A convertible debenture is a debenture that can be converted into shares of the issuing corporation after a specified period. In addition to potentially making the bonds more attractive to buyers, the option to convert gives the owner of the bond some of the advantages of a stock. Because of these advantages, convertible debentures will usually have a lower interest rate than non-convertible debentures.
Non-convertible or regular debentures can never be converted into shares of the issuing company. They simply act like a typical bond. (See reference 2)
Debentures and Stocks
In comparison to stocks, debenture bonds are typically considered more secure. As long as the company is solvent, the holder of the debenture is guaranteed a payment. At the maturity date, your principal is returned. While stocks can be volatile and have large swings in value, the value of a debenture rarely trades far from its issue price. Debentures can be good investments for people seeking a relatively safe investment that provides a higher than average interest rate.
Debentures and Bonds
A simple bond is more secure than a debenture bond, because the debenture bond is not backed by any tangible assets of the issuer. Both types of bonds will pay you a guaranteed interest rate that will not change as long as the company or issuer remains in business. Because regular bonds are backed by some form of collateral, they typically pay lower interest rates than debenture bonds. In the case of bankruptcy and liquidation, a regular bondholder will be paid back before any debenture bond owners.