What is one potential downside of a fixed interest rate from debentures?

A fixed interest rate from debentures can present a significant downside, particularly when interest rates in the broader economy rise. When a company opts for debentures with a fixed rate, it commits to paying a set interest rate over the life of the debt. If market interest rates increase after the debenture is issued, the company is locked into the lower fixed rate and misses out on the opportunity to refinance or obtain funding at the new, higher rates. This scenario creates a financial disadvantage, as the company continues to pay interest that is less favorable compared to what it could have obtained if it waited or if interest rates were variable.

Additionally, the company may face challenges in attracting investments or refinancing its existing debts, as investors seeking better returns may prefer to invest in new instruments offering higher interest rates. This fixed rate environment can hinder the company's flexibility in financial planning and investment, making this a critical point for businesses considering the structure of their debts.