when issuing a debenture first a trust indenture must be drafted the first trust is an agreement between the issuing corporation and the trustee that manages the interest of the investors 
the coupon rate is determined which is the rate of interest that the company will pay the debenture holder or investor this coupon rate can be either fixed or floating a floating rate might be tied to a benchmark such as the yield of the 10 year treasury bond and will change as the benchmark changes the company s credit rating and ultimately the debenture s credit rating impacts the interest rate that investors will receive credit rating agencies measure the creditworthiness of corporate and government issues 2 these entities provide investors with an overview of the risks involved in investing in debt credit rating agencies such as standard and poor s typically assign letter grades indicating the underlying creditworthiness the standard poor s system uses a scale that ranges from aaa for excellent rating to the lowest rating of c and d any debt instrument receiving a rating lower than a bb is said to be of speculative grade 3 you may also hear these called junk bonds it boils down to the underlying issuer being more likely to default on the debt for nonconvertible debentures mentioned above the date of maturity is also an important feature this date dictates when the company must pay back the debenture holders the company has options on the form the repayment will take most often it is as redemption from the capital where the issuer pays a lump sum amount on the maturity of the debt alternatively the payment may use a redemption reserve where the company pays specific amounts each year until full repayment at the date of maturity pros and cons of debenturesdebentures are the most common form of long term debt instruments issued by corporations a company will issue these to raise capital for its growth and operations and investors can enjoy regular interest payments that are relatively safer investments than a company s equity shares of stock debentures are unsecured bonds issued by corporations to raise debt capital because they are not backed by any form of collateral they are inherently more risky than an otherwise identical note that is secured because of the increased risk debentures will carry a comparatively higher interest rate in order to compensate bondholders this also means that bond investors should pay careful attention to the creditworthiness of debenture issuers the relative lack of security does not necessarily mean that a debenture is riskier than any other bond strictly speaking a u s treasury bond and a u s treasury bill are both debentures they are not secured by collateral yet they are considered risk free a debenture pays a regular interest rate or coupon rate return to investors convertible debentures can be converted to equity shares after a specified period making them more appealing to investors in the event of a corporation s bankruptcy the debenture is paid before common stock shareholders fixed rate debentures may have interest rate risk exposure in environments where the market interest rate is rising creditworthiness is important when considering the chance of default risk from the underlying issuer s financial viability debentures may have inflationary risk if the coupon paid does not keep up with the rate of inflation debenture risks to investorsdebenture holders may face inflationary risk 4 here the risk is that the debt s interest rate paid may not keep up with the rate of inflation inflation measures economy based price increases as an example say inflation causes prices to increase by 3 should the debenture coupon pay at 2 the holders may see a net loss in real terms debentures also carry interest rate risk 4 in this risk scenario investors hold fixed rate debts during times of rising market interest rates these investors may find their debt returning less than what is available from other investments paying the current higher market rate if this happens the debenture holder earns a lower yield in comparison further debentures may carry credit risk and default risk 5 as stated earlier debentures are only as secure as the underlying issuer s financial strength if the company struggles financially due to internal or macroeconomic factors investors are at risk of default on the debenture as some consolation a debenture holder would be repaid before common stock shareholders in the event of bankruptcy the three main features of a debenture are the interest rate the credit rating and the maturity date example of a debenturean example of a government debenture would be the u s treasury bond t bond t bonds help finance projects and fund day to day governmental operations the u s treasury department issues these bonds during auctions held throughout the year some treasury bonds trade in the secondary market in the secondary market through a financial institution or broker investors can buy and sell previously issued bonds t bonds are nearly risk free since they re backed by the full faith and credit of the u s government however they also face the risk of inflation and interest rates increase 6