Debentures

A debenture is a long-term, unsecured (naked) corporate bond. Knowing the definition of a debenture is more important than it may seem initially and can show up several times on the Series 7 exam.

In terms of risk, debentures are riskier than secured corporate bonds. With no collateral backing them, debentures are full faith and credit bonds. The issuer is legally obligated to repay their borrowed funds, but there is no asset of value that the bondholders can access should the corporation go bankrupt. Due to this risk, debentures are sold with higher coupons and traded in the market at higher yields (lower prices).

A debenture is one of many forms of long-term corporate debt, which is sometimes referred to as funded debt. The term relates to corporations having long periods of time to utilize funds raised through a bond issuance.