Question

Naked debentures are

• A. Fully secured
• B. Partly secured
• C. Unsecured
• D. None of these

Hint:

The term "naked" in finance often implies a lack of protection or collateral. For example, a "naked option" is an option contract without an underlying security. Similarly, a "naked debenture" is a debenture without any underlying security (asset).

Answer 1

The Correct Option is C

Step 1: Understanding the Question:
The question asks for the definition of 'Naked Debentures'.
Step 2: Key Concept:
Debentures are debt instruments issued by a company to raise funds. They can be classified based on the security provided to the debenture holders.
- Secured Debentures: These are backed by a charge on the assets of the company. If the company fails to repay the debenture holders, they can sell these specific assets to recover their money.
- Unsecured Debentures: These are not secured by any charge on the company's assets.
Step 3: Detailed Explanation:
The term 'Naked Debentures' is another name for Unsecured Debentures. They are issued solely on the creditworthiness and financial standing of the company. The holders of these debentures are treated as unsecured creditors. In the event of liquidation of the company, they are paid only after the claims of secured creditors have been met.
Step 4: Final Answer
Naked debentures are unsecured debentures, meaning they are not backed by any specific asset of the company.