Debenture

A debenture is a corporate bond that is not secured by any specific asset. Instead of pledging collateral, the issuer backs the bond with its full faith and credit — its general ability and promise to pay interest and principal. If the company fails, debenture holders stand in line as general creditors rather than seizing a particular asset.

This contrasts with secured corporate debt. A mortgage bond is backed by real estate, an equipment trust certificate by equipment such as aircraft or railcars, and a collateral trust certificate by a portfolio of securities the issuer owns. Because debenture holders take on more risk than secured creditors of the same company, debentures generally offer higher yields than that issuer's secured bonds. A subordinated debenture ranks even lower — its holders are paid after regular debenture holders — and yields more still.

In a corporate liquidation, the priority of claims runs from secured creditors to unsecured creditors (including debenture holders), then subordinated debt, then preferred stockholders, and finally common stockholders. Despite being unsecured, debentures from financially strong companies can still carry high credit ratings — the backing is the business itself, not a pledged asset.

Debentures appear across the securities exams: the SIE and Series 7 test the hierarchy of corporate debt and liquidation priority, while accounting exams like ACCA Financial Accounting present debenture loans as long-term liabilities on the statement of financial position.