Private businesses and governments sometimes issue debt securities to raise additional capital. These debt instruments are called debentures whenever they are not secured by any form of collateral.
Debentures, which otherwise act much like any other kind of bond, are ostensibly only backed by the faith and credit of the issuing institutions. Debentures should not be confused with debenture stocks, which are an equity security that act much more like a preferred stock than a bond.
Debenture Stocks Versus Regular Debentures
Debenture stockholders are entitled to dividend payments at fixed intervals. Like regular debentures, debenture stocks are normally not backed by any collateral. However, a form of protection may be sought through a trust deed that names a trustee to act on behalf of stockholders.
The way that debenture stocks operate is nearly identical to preferred stock.
Debenture stocks are not perceived to be less safe than other equities since they carry the same degree of risk as other types of stock issue. Unlike traditional stocks, debenture stocks provide a more reliable stream of returns.
Regular debentures act as loans against the company, which make the owner of the debenture a creditor with preferred status in case of liquidation. Debenture stocks are an equity security, not a loan. This means debenture stockholders are put in position behind debentures and all other forms of debt for liquidation purposes.
Debentures are perceived to be less safe than other bonds because they lack collateral security, although an exception is made in the case of government debentures such as U.S. Treasury Bills.