Debentures

Debentures in United States

Practical Information

Note: Some of this information was last updated in 1982

Bonds issued without security and therefore not protected by any specific lien (in U.S. law) upon property. They are simply the promise of the borrower to pay a certain sum of money at a stipulated time and place, with interest at a fixed rate. The bonds are issued under a trust indenture, which distinguishes them from ordinary notes. Debentures are issued by corporations that (1) have a relatively small percentage of tangible assets, which prevents them from issuing secured bonds, (2) have unquestionable credit ratings and can readily market unsecured bonds, or (3) have mortgaged all of their tangible assets and therefore must resort to debentures to raise funds. Trust indentures under which debentures are issued usually contain provisions or restrictions designed to protect the investment of the unsecured bondholders. The most common types of provisions are (1) covenants regarding future mortgages or pledges of property, (2) restrictions against additional indebtedness, and (3) dividend restrictions while debentures are outstanding. See also deed of trust (in U.S. law); corporate mortgage bonds (in U.S. law).

(Revised by Ann De Vries)

What is Debentures?

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Debentures in State Statute Topics

Introduction to Debentures (State statute topic)

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