Bond and Debenture Differences Explained

In this article, we will throw light on the differences between Bond and Debenture and see how debentures differ from bonds.

Whereas both Bond and Debenture is a debt security i.e. it is related to loan or borrowing etc. Let’s understand…

Note – If you want to understand the basics of share market from zero level then you should start with Part 1. – Share Market and Related

| What is the difference between Bond and Debenture ?

⚫ Both bonds and debentures are debt instruments issued by the government or companies. Both of these are fundraising tools for the issuer. 

⚫ Bonds are usually issued by the government, government agencies or large corporations while debentures are issued by public companies to raise funds from the market. 

⚫ Let us understand the differences between both the investment instruments i.e. Bonds and Debentures and see how the two differ from each other.

⚫ Bonds are a safe investment as they are secured by a type of collateral. Whereas a debenture which is another form of debt fund is unsecured in nature as companies usually issue it without collateral. That is, people invest in debentures on the basis of reputation and goodwill of the company.

⚫In bonds, the issuer’s asset is pledged as security for the debt so that if the issuer fails to pay the amount, bondholders can sell those assets to cover their debt. 

But the nature of debentures is slightly different. Debentures are not backed by any assets of the issuer, i.e. if the company fails to pay you, you cannot repay your debt by selling its assets. In this the trust factor works i.e. if you have faith in the issuer, invest, otherwise don’t.

⚫Bonds are issued for a fixed period and a fixed interest is paid on it at regular intervals such as monthly, half yearly or annually called coupon. Whereas this is not the case in debentures, it usually depends on the performance of the company, how much interest you will get. This is usually for a short period but it depends on the issuer.

⚫ The interest rate of bonds is generally lower than that of debentures. The interest rate is low and the risk is also low. One reason for this is that the issuer’s companies are periodically reviewed by credit rating agencies. 

While the interest rate of debentures is higher than that of bonds, its risk factor is also higher than bonds because it depends on the performance of the issuer, how much interest will be paid and how often.

⚫ Generally bonds are issued by government agencies whereas debentures are issued by private/public companies.

Overall this is the difference between bonds and debentures, hopefully understandable. The link of other articles related to this is given below, you must also read it-

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| Basic Concept Series (BCS)