Final answer:
A debenture is a type of bond issued by corporations or governments to raise capital. Unlike a mortgage-backed security, it is not backed by specific collateral but relies on the creditworthiness of the issuer. Debenture holders have a claim on the assets of the issuer in case of default.
Step-by-step explanation:
A debenture can be defined as a type of bond that is issued by corporations or governments to raise capital. It is a long-term debt instrument that represents a loan agreement between the issuer and the holder of the debenture. The issuer promises to repay the principal amount borrowed along with interest over a specified period of time.
Unlike a mortgage-backed security, which is backed by real estate assets, a debenture is not backed by any specific collateral. Instead, it is backed by the general creditworthiness and reputation of the issuer. This means that if the issuer defaults on the repayment, the debenture holders have a claim on the assets of the company, but they are not specifically tied to any particular asset.
For example, let's say Company XYZ issues a debenture with a face value of $1,000 and an annual interest rate of 5%. The debenture holders will receive interest payments every year, and at the end of the specified period, they will receive the principal amount. If Company XYZ fails to make the interest payments or repay the principal amount, the debenture holders have the right to take legal action to recover their investment.