Q13-7. What is a debenture? Why do you think that this is the most common form of corporate bond in the United States? Is it is much less commonly used elsewhere?

A13-7. Corporations issue bonds to raise money to expand their businesses, cover operating costs, or finance corporate takeovers or reorganizations. Corporate bonds are debt obligations issued by corporations. Corporate bonds may be either secured or unsecured. Debentures are unsecured bonds, which means that bondholders have nothing but the corporation's promise that interest payments will be made on time, or made at all. This promise is often called "full faith and credit." Debentures are not backed by equipment, securities portfolios, mortgages on real estate, or any other specific assets. Instead of guaranteed collateral, debenture-holders are secured in their principal investment by the general credit of the issuer. Thus, while secured bondholders have priority over debenture-holders in the event of default or bankruptcy, debenture-holders have the same priority as other general creditors, such as banks, insurance companies and other financial institutions, and greater priority than shareholders of common or preferred stock. Debentures usually offer higher yields than secured bonds, which is the expected trade-off for increased risk to the principal investment. Debentures are the most common type of corporate bond. These bonds have no specific collateral such as real property or equipment, but are instead generally secured by all of the property of the issuing company. These bonds are popular with relatively stable companies that do not need to put up collateral against their loans because of the relatively low risk of default.
Companies sometimes issue debentures because they don't have enough assets to collateralize into a secured bond issue, or have already collateralized all their