Definition of Debentures
Debentures are debt instruments that the borrower issues in order to raise funds. The company issuing the debentures offers a periodic interest payment to the debenture holders until the maturity of the debenture. The interest can be paid monthly, quarterly, semi-annually, or annually and is normally based on coupon payment on the principal value also called the face value or par value.
Example of Debentures:
A company-issued 500, $1,000 debentures and offered a 12% interest payable every six months for 5 years. Let’s assume that all the debentures were purchased, so the company will raise funds of $500,000 in cash and liability will appear in the balance sheet. After 6 months the company will pay an interest of $30,000 ($500,000 x 12% x 6/12) to debenture holders. This will continue until the debentures are matured at the end of five years. Then the company will repay the principal value to the debenture holders.