Mortgage Bonds (3)
by MaestriDebentures A debenture is an unsecured bond, and as such it provides no lien against specific property as security for the obligation. Debenture holders are, therefore, general creditors whose claims are protected by property not otherwise pledged. In practice, the use of debentures depends both on the nature of the firm’s assets and on its general credit strength. Extremely strong companies often use debentures; they simply do not need to put up property as security for their debt. Debentures are also issued by weak companies that have already pledged most of their assets as collateral for mortgage loans. In this latter case, the debentures are quite risky, and they will bear a high interest rate.
Subordinated Debentures The term subordinate means “below,” or “inferior to,” and, in the event of bankruptcy, subordinated debt has claims on assets only after senior debt has been paid off. Subordinated debentures may be subordinated either to designated notes payable (usually bank loans) or to all other debt. In the event of liquidation or reorganization, holders of subordinated debentures cannot be paid until all senior debt, as named in the debentures’ indenture, has been paid.
Taken From : Five-Minute MBA – Corporate Finance
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