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Debenture vs. Indenture — What's the Difference?

By Tayyaba Rehman & Urooj Arif — Updated on March 21, 2024
Debenture refers to a type of long-term debt instrument, while an indenture is a formal agreement specifying the terms of a bond issue.
Debenture vs. Indenture — What's the Difference?

Difference Between Debenture and Indenture

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Key Differences

A debenture is a type of debt instrument unsecured by collateral, issued by companies to borrow money. Typically, debentures rely on the issuer's creditworthiness and reputation for investor assurance. On the other hand, an indenture is a legal contract between a bond issuer and the bondholders, detailing the terms, conditions, and covenants of the bond issue.
Debentures often carry a fixed interest rate, with the principal amount repaid at the end of the term. They may offer higher interest rates to compensate for the lack of collateral security. In contrast, the indenture document includes specifics such as the interest rate, repayment schedule, and any special features like convertibility or call provisions.
The concept of a debenture is more common in certain regions, such as the UK, where it signifies a broader range of debt securities, including secured ones. Indentures, however, are a universal component of bond issues in many jurisdictions, serving as a critical document in the bond market to ensure clarity and protect the interests of all parties involved.
Debentures are typically issued by corporations to raise capital for expansion or operational needs, leveraging their financial stability to attract investors. The indenture, however, is a foundational document that ensures the bond issuance process is transparent and legally binding, specifying rights and obligations of the issuer and the bondholders.
While debentures represent a financial instrument for investment, offering potential returns to holders, the indenture is essentially a legal tool, ensuring compliance and security for bond investors. It does not in itself offer financial returns but underpins the trust and legal framework within which debentures and other bonds operate.
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Comparison Chart

Definition

A type of unsecured debt instrument issued by companies.
A legal contract specifying the terms of a bond issue.

Security

Unsecured, relies on issuer's creditworthiness.
N/A (document detailing security, if any, for bonds).

Purpose

To raise capital for the issuer.
To outline the terms, conditions, and covenants of the bond.

Interest Rates

Often fixed, potentially higher due to lack of collateral.
Specified in the document, can vary widely.

Regional Prevalence

More common in certain areas like the UK.
Universal in bond markets, across various jurisdictions.

Compare with Definitions

Debenture

Issued by companies to raise capital, not backed by collateral.
A company may issue debentures to fund a new project.

Indenture

Outlines terms and conditions of a bond issue.
An indenture might specify the maturity date, interest rate, and payment schedule of a bond.

Debenture

Typically offers fixed returns to investors.
Debenture holders might receive a fixed 5% annual interest.

Indenture

Designed to safeguard the rights of bondholders and issuers.
The indenture may outline actions in case of issuer default.

Debenture

Investors depend on the issuer's financial stability.
A well-established corporation might issue debentures based on its strong credit rating.

Indenture

Includes interest rates, repayment terms, and covenants.
The indenture may include covenants protecting bondholder interests.

Debenture

Offers potential returns based on issuer's performance.
Investors buy debentures anticipating profitable returns over time.

Indenture

Ensures clarity and legality in bond issuance.
Indenture documents are essential for the trust and legality in the bond market.

Debenture

Used by corporations for funding expansion or operational needs.
Debentures can provide essential capital for company growth.

Indenture

A standard document in bond issuances worldwide.
Regardless of jurisdiction, bond issues typically involve an indenture.

Debenture

In corporate finance, a debenture is a medium- to long-term debt instrument used by large companies to borrow money, at a fixed rate of interest. The legal term "debenture" originally referred to a document that either creates a debt or acknowledges it, but in some countries the term is now used interchangeably with bond, loan stock or note.

Indenture

An indenture is a legal contract that reflects or covers a debt or purchase obligation. It specifically refers to two types of practices: in historical usage, an indentured servant status, and in modern usage, it is an instrument used for commercial debt or real estate transaction.

Debenture

A certificate or voucher acknowledging a debt.

Indenture

Often indentures A contract binding one party into the service of another for a specified term.

Debenture

An unsecured bond issued by a civil or governmental corporation or agency and backed only by the credit standing of the issuer.

Indenture

A deed executed by more than one party.

Debenture

A customhouse certificate providing for the payment of a drawback.

Indenture

An instrument or agreement specifying the terms of a bond or trust.

Debenture

A certificate that certifies an amount of money owed to someone; a certificate of indebtedness.

Indenture

A document separated into portions so as to create indentations that allow the holders of the separate portions to match up in order to confirm authenticity.

Debenture

(obsolete) A certificate of a loan made to the government; a government bond.

Indenture

To bind into the service of another by indenture.

Debenture

A type of debt instrument secured only by the general credit or promise to pay of the issuer, not involving any physical assets or collateral, now commonly issued by large, well established corporations with adequate credit ratings.

Indenture

(legal) A contract which binds a person to work for another, under specified conditions, for a specified time (often as an apprentice).

Debenture

A document granting lenders a charge over a borrower’s physical assets, giving them a means to collect a debt, as part of a secured loan.

Indenture

A document, written as duplicates separated by indentations, specifying such a contract.

Debenture

A writing acknowledging a debt; a writing or certificate signed by a public officer, as evidence of a debt due to some person; the sum thus due.

Indenture

An indentation; a recess.

Debenture

A customhouse certificate entitling an exporter of imported goods to a drawback of duties paid on their importation.

Indenture

(legal) To bind a person under such a contract.

Debenture

Any of various instruments issued, esp. by corporations, as evidences of debt. Such instruments (often called debenture bonds) are generally, through not necessarily, under seal, and are usually secured by a mortgage or other charge upon property; they may be registered or unregistered. A debenture secured by a mortgage on specific property is called a mortgage debenture; one secured by a floating charge (which see), a floating debenture; one not secured by any charge a naked debenture. In general the term debenture in British usage designates any security issued by companies other than their shares, including, therefore, what are in the United States commonly called bonds. When used in the United States debenture generally designates an instrument secured by a floating charge junior to other charges secured by fixed mortgages, or, specif., one of a series of securities secured by a group of securities held in trust for the benefit of the debenture holders.

Indenture

To indent; to make hollows, notches, or wrinkles in; to furrow.
Though age may creep on, and indenture the brow.

Debenture

A bond that is backed by the credit of the issuer but not by any specific collateral

Indenture

The act of indenting, or state of being indented.

Debenture

A certificate or voucher acknowledging a debt

Indenture

A mutual agreement in writing between two or more parties, whereof each party has usually a counterpart or duplicate, sometimes with the edges indented for purpose of identification; sometimes in the pl., a short form for indentures of apprenticeship, the contract by which a youth is bound apprentice to a master.
The law is the best expositor of the gospel; they are like a pair of indentures: they answer in every part.

Indenture

A contract by which anyone is bound to service.

Indenture

To indent; to make hollows, notches, or wrinkles in; to furrow.
Though age may creep on, and indenture the brow.

Indenture

To bind by indentures or written contract; as, to indenture an apprentice.

Indenture

To run or wind in and out; to be cut or notched; to indent.

Indenture

A concave cut into a surface or edge (as in a coastline)

Indenture

Formal agreement between the issuer of bonds and the bondholders as to terms of the debt

Indenture

A contract binding one party into the service of another for a specified term

Indenture

The space left between the margin and the start of an indented line

Indenture

Bind by or as if by indentures, as of an apprentice or servant;
An indentured servant

Common Curiosities

Can debentures be secured?

While traditionally unsecured, in some regions like the UK, the term debenture can also refer to secured debt instruments.

What is a debenture?

A debenture is an unsecured debt instrument issued by companies to raise capital, relying on the issuer's creditworthiness rather than collateral.

How does an indenture protect bondholders?

An indenture protects bondholders by legally binding the issuer to the terms outlined in the document, including repayment terms and covenants.

What does an indenture document include?

An indenture includes detailed terms of a bond issue, such as interest rates, repayment schedule, covenants, and rights and obligations of the parties involved.

What's the difference between a debenture and a bond?

A bond is a broader term that can include secured and unsecured debt securities, while a debenture specifically refers to an unsecured bond in many jurisdictions.

Can individuals issue debentures?

Typically, debentures are issued by corporations and government entities, not individuals.

Are debentures a good investment?

Debentures can be a good investment for those seeking fixed-income securities, but they carry a higher risk due to the lack of collateral.

Who uses indentures?

Indentures are used by bond issuers and bondholders to outline and agree upon the terms of a bond issue.

Is an indenture required for all bond issues?

Most formal bond issues involve an indenture to ensure legal clarity and protection for all parties involved.

How can an investor evaluate a debenture?

Investors can evaluate debentures based on the issuer's credit rating, the debenture's interest rate, and the terms outlined in any associated indenture.

What happens if a company defaults on a debenture?

In the event of a default, debenture holders are considered unsecured creditors and may not recover their investment fully.

Do indentures apply to other forms of debt besides bonds?

Indentures are primarily associated with bond issues, though similar agreements can be used for other types of debt.

What are the risks associated with investing in debentures?

The risks include the issuer's default risk, interest rate risk, and the lack of collateral in case of default.

How are debenture interest rates determined?

Debenture interest rates are influenced by the issuer's credit rating, market conditions, and the term of the debenture.

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Author Spotlight

Written by
Tayyaba Rehman
Tayyaba Rehman is a distinguished writer, currently serving as a primary contributor to askdifference.com. As a researcher in semantics and etymology, Tayyaba's passion for the complexity of languages and their distinctions has found a perfect home on the platform. Tayyaba delves into the intricacies of language, distinguishing between commonly confused words and phrases, thereby providing clarity for readers worldwide.
Co-written by
Urooj Arif
Urooj is a skilled content writer at Ask Difference, known for her exceptional ability to simplify complex topics into engaging and informative content. With a passion for research and a flair for clear, concise writing, she consistently delivers articles that resonate with our diverse audience.

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