Series 7: 2.9.1 Debentures

2.9.1  Debentures

Debentures are bonds not secured by a physical asset or collateral, but simply by the “full faith and credit” of the issuer. Generally issued by well-established companies with high credit ratings, debentures are purchased in the belief that the issuer is unlikely to default on the repayment. Less creditworthy companies may need to add protective covenants to provide assurance for the potential bondholder. Investors in debentures have a general claim on all assets not pledged to secure other debt. They also have a claim on pledged assets, to the extent that these assets yield more than is needed to satisfy secured creditors.

You may hear the order of priority in liquidation phrased in terms of seniority. Claims on assets (whether from debt such as bonds or equity