Advantages and Disadvantages of Debentures

The Advantages of Debentures are as follows:

1) The holders of the debentures are entitled to a fixed rate of interest. It can be presented as "5% Debenture".

2) Debentures are for those who want a safe and secure income as they are guaranteed payments with high interest rates.

3) They have priority over other unsecured creditors when it comes to debt repayment.

The Disadvantages of Debentures are:

1) Unlike ordinary shares, debenture holders are not considered the owners of the company. They are long term loan capital and holders will have no right to vote at the annual general meeting.

2) Debentures are more secure than stocks, but will lead to a lower rate of theoretical return.

3) It is a type of debt instrument which is not secured by collateral (or physical asset). In case of bankruptcy, the bond holders are given priority over the debenture holders.

* Next: Features of Debentures