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In Law, What Is Debenture?

Debenture is a general term that loosely refers to debt, but can also refer to more specific things such as the debt itself, the document that details the debt, or a type of bond or security issue provided by a company for a debt.

There are two types of debentures used in finance by corporations or companies who wish to raise capital. A debenture is bought by an individual who is repaid at a schedule date and is also entitled to the interest incurred. The first type is an unsecure debenture wherein the person who has bought the debenture is generally considered a creditor. Ergo, if the entity that has sold the debenture has gone into bankruptcy, the entity is not immediately obliged to repay those who have bought the debenture. The second type of debenture is secure in that those who buy debentures are assured of repayment no matter what the outcome is.

An unsecure debenture is usually issued by corporations or government entities that have had little history of defaulting on their repayments. Thus, there are those who prefer to invest in this type of debenture since it is more likely that repayment will be done.

Another classification of debentures involves the type of repayment given. A convertible debenture is given in the form of cash or stock as opposed to nonconvertible debenture, which may be in the form of an asset.

A debenture may also be commonly referred to as an agreement of debt between 2 parties. It is considered a contract between 2 parties that provides information with regards to the parties involved and the terms of the loan.

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