Debentures Securities Issued
Debentures, securities issued by joint-stock companies in return for long-period loans, usually ten to forty years. They may be 'redeemed' (repaid) before the final date if the borrower wishes; or they may be irredeemable. Debentures are a debt of a company and not part of its capital. They are normally secured by a mortgage on its fixed property or by a floating charge on some or all of its assets. Debentures therefore form a suitable form of finance for companies earning steady profits and owning large fixed assets which may be pledged as security, e.g. breweries.
A holder of debentures is entitled to a fixed rate of interest each year whether the company is earning profits or not. If a company is unable to pay the interest due, the debenture stockholders may force it into liquidation or appoint a receiver and manager to run it in their interests.
The market price of debentures depends upon the general level of interest rates and the trading risks of the company. Since they do not share in profits, debentures provide no hedge against inflation: their yield in times of prosperity are therefore usually higher than the current yield on ordinary shares (equities).
Debt, a sum of money, goods or services owed by one person or organization to another. Mc1ern economic society rests largely on debt short-term or long-term. Relatively few transactions are paid in cash. Credit is used for buying homes, and other buildings, durable consumer goods, industrial plant and machinery, clothes, food, and so on. Shakespeare's 'neither a borrower nor a lender be' (Polonius to Laertes in Hamlet) would bring a modem economy almost to a standstill.
Debt is sometimes divided into 'living' (used to finance current economic activity) and 'deadweight' (which was used to finance past wars).
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