Question

Explain types of debentures from the point of view of security.

Hint:

Secured = backed by assets; Unsecured = no asset security, higher risk.

Answer 1

From the security point of view, debentures are classified into two categories. The first type is secured debentures. These debentures are backed by a charge on the company's assets, which may be fixed or floating. If the company fails to pay interest or principal, debentureholders can claim the secured assets. The second type is unsecured debentures, also known as naked or simple debentures. These do not carry any charge on assets and rely entirely on the creditworthiness and reputation of the company. Because unsecured debentures carry higher risk, they generally offer a higher rate of interest to attract investors. Both types help companies raise long-term funds based on their financial strength and security structure.