Question

Which of the following best describes a debenture? (Published CFP question, 1996)

a, A corporate debt obligation that allows the holder to repurchase the security at specified dates before maturity

b, Unsecured corporate debt

c, A long-term corporate promissory note

d. An investment in the debt of another corporate party

Answer 1

In corporate finance debenture is a medium- to long-term debt instrument used by large companies to borrow money, at a fixed rate of interest. In 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.

A debenture is a type of debt instrument that is not secured by collateral and usually has a term greater than 10 years.Debentures are backed only by the creditworthiness and reputation of the issuer.

According to me correct option is b,

a) incorrect as holder of the security i.e. debenture holder generally does not have right to repurchase the security until and unless specially mentioned in debenture documents.

b) As per the explanation given in para 2, most appropriate answer is b

c)A promissory note is a financial instrument that contains a written promise by one party to pay another party a definite sum of money, either on demand or at a specified future date. As debenture is not a promissory note it cannot be considered as most appropriate answer.

d) Investment in debt of another corporate party cannot be considered as debenture as it can be anything like loan, bond issue, promissory note etc.