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Looking at a half-full glass of water, you will never be empty-handed. Another effective method of acquiring funds is borrowing. Usually, companies borrow funds through bonds and debentures. Let’s understand with the help of this article what debentures and their types are.
What is Debenture?
A debenture is a financial term derived from the Latin word “debere” which simply means to borrow. It is a type of investment given by a business or other organizations to fund the small-caps, start-ups, and established organizations for their long-term operations and growth. The companies pay their debenture holders a fixed interest rate on these investments or securities which are repayable after a fixed period.
This form of capital is considered debt capital, so it appears as debt on the balance sheet of the issuing company.
In simple terms, it is just a legal document that shows how much the investor has invested (principal amount), how much interest will be paid, and when the payments will be made.
Who are Debenture Holders?
The debenture holders are called as “creditors” and solely lend to the company. The main difference between the shareholders and debenture holders is that shareholders actively get themselves involved in the decision-making process of the company. On the other hand, debenture holders have no voting rights and cannot participate in the decision-making process.
Let’s have an example and suppose that the government raises funds to build roads for the general public. Now what happens next
Read Now: Type of Debentures
