Naked Debenture Definition
A debenture is a debt instrument issued by corporations and governments to raise funds. In the United States, a debenture that is not secured by any specific asset is called a “naked debenture” or “uncovered debenture”.
A Little More on Naked Debentures
In a naked debenture, the investor has the issuer’s promise of repayment of the interest and principal but has no claim on any specific collateral. If the issuer defaults, the debenture holders are to be considered as general creditors. The owners of naked debentures can claim the company’s asset on the occasion of default, only after the investors whose securities are higher in the capital structure are paid their due.
As a naked debenture is not backed by any physical asset or collateral, the debentures are considered to be covered by the full faith and credit of the issuer. So practically, it is a certificate of loan that ensures the company is liable to pay the stated amount with interest but that is not guaranteed by any collateral. The fund raised by debenture becomes a part of the company capital, but it doesn’t become share capital.
In the U.S., the government issues debentures in form of Treasury bonds or Treasury bills. The buyers buy these bonds based on the trust that the government won’t fail to pay back the amount along with its interest. There are no collaterals involved in this. However, it is to be remembered that the U.S Treasury bills are considered to be one of the safest investments.
Debentures are the most common form of long-term loans, taken by corporations with a fixed rate of interest and a fixed date of repayment. Usually, the corporations pay the interests of debentures before paying the dividends to its shareholders.
The government and big corporations issue the naked debentures frequently to raise capital. As people have full confidence in the government and big corporations, they invest their money in such bonds. In the history of more than 200 years, the U.S. government has never failed to pay the scheduled interest or full principal upon maturity. Only the organizations and companies with a good reputation and strong economy issue the uncovered debentures. So, even without a collateral, the naked debentures are often more secure than the secured bonds.
The issuing company signs an agreement with the trust that manages the interest of the prospective debenture holder for issuing debentures. The agreement is documented in an indenture.
References for Naked Debenture
Academic Research on Naked Debenture
- · naked debenture. A DEBENTURE which is issued in respect of an unsecured loan. named vote. A vote in which a record is kept of each personal vote; it is normally …, Lamming, R. (1988).
- · SUPPLY OF CREDIT IN THE PUBLIC SECTOR MORTGAGE AND NAKED DEBENTURE, TỬ, T. T. (2017). Journal of Economic Development, 1-1.
- · combination of short-term and long-term loans. The UK’s National Debt was es tab-lished in 1694. See also Government securities and consols., Congress, T. U. (1980).
- · The Naked Commodity Option Contract as a Security, Long, J. C. (1973). Wm. & Mary L. Rev., 15, 211.
- · Priority between a Debenture Holder Secured by a Floating Charge and an Execution Creditor, Mills, J. E. A. (1986). U. Ghana LJ, 17, 27.
- · In pursuit of the naked short, Stokes, A. B. (2009). NYUJL & Bus., 5, 1. This article investigates the inceptions of stripped short-selling suit; considers the disappointments of noteworthy bare short-selling claims in government court; reviews the hindrances raised by and large by protected standing prerequisites, the Federal Rules of Civil Procedure, the Private Securities Litigation Reform Act, business firms, demise winding lenders, and the Depository Trust and Clearing Corporation; looks at the viability of Regulation SHO, SEC principle 10b-21, and new FINRA rules; talks about late state enactment and state court case; and distinguishes non-prosecution alternatives to control bare short-selling. At last, this article tries to respond to the inquiry: If manipulative bare short-selling is in excess of a fanciful substitute for little top disappointment, what cures are, or ought to be, accessible?
- · MONETARY POLICY SERIES NO 31, Ajayi, O. I. A slope was constructed to factor the changes in the federal fund’s futures in different horizons. The prediction significant to the slope as regards stock returns at a weekly basis was: the faster monetary policy which positively predicts the excess profits. Investors can achieve an increase every week in a ratio of 20% which conditions the slope factor. The slope predicts changes in future interest rates and forecasts the revisions of professional forecasters. The findings revealed that the path of future interest rates matters for the asset prices and monetary policy, as it affects the asset prices all year round and not only at the FOMC meetings.
- · The Machinery for Raising Capital by Companies through Debt Finances in Nigeria, Aina, K. (2011). Int’l J. Advanced Legal Stud. & Governance, 2, 85.
- · Investment: depth classification version of CC, Neelameghan, A. (1971)..
- · Corporate Finance, Turner, D., Turner, P., & Voysey, P. (1996). (pp. 27-38). Palgrave, London.
- · CDs We Trust-An Analysis of Credit Default Swaps in Contract and Regulatory Law, Ladon, P. (2011). Rutgers Bus. L. Rev., 8, 34. Subsidiaries and other “imaginative” money related instruments, for example, collateralized obligation commitments (CDOs) and manufactured CDOs were to a great extent in charge of the breakdown of the economy in 2008. The advancement of these instruments has likewise added to expanded exchanging action. Before 2000, subordinates were a minor factor in the economy. In June 2000, the notional volume of subordinates was $94 trillion. By June 2011, subsidiary volume had ascended to $706.884 trillion, preceding falling back to $638.928 trillion in June 2012. This is an eight-overlay to nine-overlap increment in such volume. In spite of the fact that relationship positively does not suggest causation, it is genuinely certain that the economy performed far superior in the late 1990s.