Question : A debenture is a type of:
Option 1: Equity instrument
Option 2: Debt instrument
Option 3: Derivative instrument
Option 4: Mutual fund
Correct Answer:
Debt instrument
Solution : The correct answer is (b) Debt instrument.
A debenture is a type of debt instrument. It represents a loan or bond issued by a company or government entity to raise funds. Debentures are typically long-term debt instruments with a fixed maturity date and a specified interest rate.Debentures are considered as a form of borrowing for the issuer, where the investors who purchase debentures become creditors of the company or entity. They have a legal claim on the issuer's assets and are entitled to receive periodic interest payments and the repayment of the principal amount at maturity. Debentures differ from equity instruments, such as stocks, which represent ownership in a company. While equity shareholders have ownership rights and can participate in the profits of a company, debenture holders are creditors and have a fixed claim on the company's assets.
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