Understanding the Difference Between Bonds and Debentures

Investors are expanding their scope of investment beyond conventional financial instruments like shares and fixed deposits. Among the various financial instruments available to the retail investor, several types of bonds and debentures are popular debt instruments that tend to confuse investors due to the similarities in their nature. 

To help investors understand the two investment options better, here is a quick guide to the difference between bonds and debentures.

Bonds

Private corporations, government agencies, and other financial institutions often issue bonds to arrange finance. Bonds are a kind of loan that is secured by their physical assets. Bond investors are like lenders who get the promise of the invested amount and, in most cases, a periodic interest throughout the bond’s life. 

Debentures

Debentures are financing instruments raised by corporations to arrange finance to meet planned expenses like expansion or an upcoming project. Debentures have a fixed repayable date and pay a fixed or floating interest rate to the debenture holders. Debentures are not backed by a physical asset. 

Bonds vs Debentures

The difference between bonds and debentures can be understood based on some crucial factors:

Public or private corporations, as well as government agencies, can issue bonds for long-term monetary requirements.

Debentures are issued by only public or private corporations to meet their immediate capital needs. 

Bonds are secured financial instruments and are backed by the assets of the issuer as collateral. It makes bonds a relatively safer investment option. The chances of default of bond issuers are much less than other investment options. 

Debentures may or may not be secured in nature. It makes them riskier compared to debentures. In most cases, when large corporations issue debentures, they do not back them up with any assets, and people invest in these debentures solely based on their trust in the issuing company. 

Government agencies and public & private corporations issue bonds with a long-term vision in mind, thus bonds are usually a long-term investment.

Generally, private and public corporations issue debentures to meet an immediate financial requirement. Due to this, debentures are usually short-term in nature. If the issuer envisions a long-term use of the finance he raises, debentures can be long-term in such cases. 

Bonds are one of the safest investment options available to investors. Bonds have the backing of the assets of the issuer, which takes away the risk of default from them. Credit rating agencies periodically review the bonds and the issuing corporations, which further tell the investors about the reliability of the bonds. 

Debentures are relatively riskier than bonds as they are not backed by any collateral. Debentures get their credibility only from the reputation of the issuing company, which makes them highly risky. 

If an issuing company has issued bonds and debentures both and is on the verge of undergoing liquidation, bondholders get a priority over debenture holders for the repayment of the principal and interest amounts. 

The negligible risk on bonds leads to a lower interest than debentures, but they offer assurance of repayment and priority status to the bondholders. To invest in bonds and debentures online, visit Bonds India, one of the most trusted online platforms to invest in bonds and other financial instruments.