1. Home
  2. Stock Market Guide

Difference Between Bond and Debentures

5paisa Capital Ltd

banner

Want to start your Investment Journey?

+91
Resend OTP
By proceeding, you agree to all T&C*
hero_form

Content

Financing is necessary for all companies, including small enterprises, established businesses, and government entities, to effectively carry out their operations. Obtaining additional funds through borrowing is a common approach employed by these entities. Bond vs debentures are prominent options among the various methods of borrowing money. Both bonds and debentures are debt instruments issued by governments or companies. 
By selling bonds, the issuing institution raises capital, while investors receive the assurance of fixed returns in terms of repayment and interest on the principal amount. Various types of bonds and debentures exist depending on these agreements' specific terms and features. Now, let's delve deeper into the difference between bond and debentures.
 

What is Debenture?

Similar to bonds, debentures are financial instruments organizations use to secure funding for their operational requirements. Unlike bonds, debentures are typically not backed by any physical assets of the issuing entity, making them inherently riskier. These instruments also carry a fixed or floating interest rate. Regarding payment priority, debenture holders are given precedence over shareholders when receiving interest payments or dividends. Due to the absence of physical asset collateral, debentures generally carry higher interest rates than bonds.

The types of Debentures are: 

●    Non- Convertible Debentures 
●    Convertible Debentures 
●    Unsecured Debenture
●    Secured Debenture 
●    Irredeemable Debentures 
●    Redeemable Debenture 
 

What is Bond?

Both public and private sector companies use bonds as debt instruments to generate capital for their operations. Government agencies, financial institutions, and private enterprises issue these instruments to investors. Tangible assets possessed by the issuer back bonds. The holder of bonds acts as the lender, while the issuer serves as the borrower. The borrower can issue bonds to the lender, committing to repay the loan at a predetermined maturity date and a fixed interest rate. Generally, the interest rate on bonds is lower than debentures since the company's physical assets secure bonds, whereas debentures are unsecured instruments.

The types of Bonds are:

●    Government Bonds 
●    Corporate Bonds 
●    Municipal Bonds 
●    Tax-Saving Bonds 
●    Perpetual Bonds 
●    Convertible Bonds 
 

Important Considerations

The absence of security does not necessarily imply that a debenture is riskier than other bonds. Conversely, debentures are the most prevalent type of long-term debt instrument corporations issue. For instance, a company may issue bonds to raise funds for expanding its retail stores to repay the amount from future sales. The creditworthiness of the bond is determined by the company issuing it.
Both bond vs debentures provide companies and governments with financing beyond their regular cash flows. Risk-averse investors are advised to invest in bonds, as they carry lower risk and are considered safer investments than debentures. Bonds also serve as favourable long-term investment options, offering fixed interest payments and principal repayment at predetermined intervals. Furthermore, bonds are backed by collateral, unlike debentures.
On the other hand, investing in debentures can yield higher returns than bonds. Debentures can be attractive as short-term investment options. After carefully considering the benefits and risks of both options, the choice between investing in bond vs debentures ultimately depends on your specific investment objectives.

 

Debenture Vs. Bond: Key Difference

The difference between bond and debentures are:

Parameter

Debentures

Bonds

Collateral

Debentures might or might not be secured by something. Investors must thus base their purchases on these firms' credit ratings.

Bonds are frequently backed by property.

Tenure

Companies issue debentures for short or long terms depending on their need for funds.

Debentures often have a shorter duration than bonds.

Issued by

Debentures are issued mainly by private businesses.

Big businesses, governments, financial organisations, etc., typically issue bonds.

Interest Rate

Since they are unsecured, debentures have higher interest rates. Additionally, the investor only depends on the issuer's reputation and trustworthiness.

Bonds provide reduced interest rates due to future repayment reliability and collateral support.

Payments 

According to the prospectus, interest on debentures is paid regularly. However, how well the issuing firm does will determine this.

Bond interest is paid on an accrual basis, whether monthly, semi-annually, or annually. These rewards are independent of the company's success.

Risk

Debentures are risky since they lack any backing from collateral. Only the issuing company's reputation and credit rating agencies' rating matter.

Bonds are more secure than debentures since they are backed by collateral. Additionally, credit reporting agencies routinely assess and rate the issuing party.

Convertibility

Only convertible and partially convertible debentures may be converted into equity shares by the issuing business at the stipulated time upon expiration.

Bonds can't be converted into corporate stock shares.

Liquidation

Debenture holders are compensated following bondholders in the liquidation process.

Priority is given to bondholders during a company's liquidation over debenture holders.

 

Conclusion

So, this was all about the difference between bond and debentures. Bond vs debentures are both types of debt instruments that offer investment opportunities. However, choosing between being a risk-taker or playing it safe is entirely up to you. If you prefer a more conservative approach, bonds are a suitable option. However, if you want to take a risk, investing in debentures issued by reputable companies can provide attractive interest repayments and potential equity.
Starting with bonds and gradually exploring debenture opportunities is advisable for beginners in the investment game. Considering essential factors such as interest rates, repayment duration, and other relevant options when investing in either debt instrument is essential.
 

More Articles to Explore

Learn more

Stock / Share Market Demat Account Online Trading Mutual Funds Commodity Trading Basics IPO Trading Holiday Derivatives Trading Basics Tax Generic International Markets Banking Currency Insurance ETF Algo Trading

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing. For detailed disclaimer please Click here.

Frequently Asked Questions

They are the long-term financial instruments that, after a predetermined time, the issuer may convert into equity shares.

Convertible Bonds are long-term, fixed-asset financial instruments which you may convert into equity shares by the corporation after a predetermined amount of time. 

Since businesses utilise them to raise funds with the commitment to return them after a specific term, they are known as debt instruments. Companies also pay interest to their stockholders.

Open Free Demat Account

Be a part of 5paisa community - The first listed discount broker of India.

  • Flat brokerage
  • Dedicated platform for F&O
  • 0 account opening charges
  • Trade on charts
  • MTF facility up to 4X leverage
  • 0%* Commission on Mutual funds
+91
Resend OTP

By proceeding, you agree to all T&C*

footer_form