Bonds and debentures are debt instruments used to generate capital, but they do have their share of differences. Not every bond is a debenture, but all debentures can be bonds. Although these two financial debt instruments are issued to raise capital or funding from the public, they both function differently. Going forward, we’ll understand their differences in detail.
What is a Bond?
A bond is a debt instrument offered by private companies, government agencies, and financial corporations to bring additional money into the business from the people. This fundraising document acts as an IOU between bond lenders and borrowers. They are one form of secured loan taken from the public in return for a specified interest rate and repayment of loan amount upon the date of maturity.
What are Debentures?
Debentures are also debt instruments like bonds, but they are issued by private companies for a special purpose. While this fundraising instrument is used to raise funds, they are used to cater to a requirement of the company. It can be anything like expanding the entity, starting a new project, etc.
10 Differences Between Bonds and Debentures
So far, you have read and understood the basic concepts of bonds and debentures. Now, let’s help you understand the subtle differences between the two.
|Meaning||A bond is a debt instrument issued by private and public organizations to collect funds from the people with the commitment to pay periodic interests and repay the loan on the date of bond maturity.||A debenture is a debt instrument issued by private corporations to raise funds for a specific purpose. In return, the debenture holders are given the first preference to receive interest over stockholders. The purpose of debentures is to raise finances for the short-term or long-term.|
|Holder||An investor who receives the bond is called a bondholder.||Investors who receive debentures are called debenture holders.|
|Issuing Entity||Bonds are issued by private entities, financial companies and government agencies.||Debentures are issued by private entities to meet specific needs in the business.|
|Risk||Bonds are one of the secured investment options. They are less risky compared to other avenues.||Unlike bonds, debentures are high-risk instruments because they are not attached to any security.|
|Interest rate||Bonds carry an Interest rate also called coupon to be paid on regular intervals till the time of Maturity||Debentures is like bonds carry an Interest rate also called coupon to be paid on regular intervals till the time of Maturity or at the time of maturity of NCD.|
|Collateral||Bondholders receive interest monthly or annually. They are not affected by market volatility either.||The debenture holder receives periodic interests.|
|Payment||Bondholders receive interest monthly or annually. They are not affected by market volatility either.||The debenture holder receives periodic interests.|
|Convertibility||Bonds cannot be converted into equity or other instruments.||According to the issuer’s offering, the debenture holder can convert the debt instrument into a prefixed number of shares after a set time mentioned in the document.|
|Priority||Bondholders are given the top priority at the time of liquidation or unforeseen situations in the company.||A debenture holder is the first one to be paid before equity shareholders.|
|Tenure||Bonds are issued for a longer tenor but depend upon the issuer to decide the period which can vary from 1-15 year.||Investment in debentures is done for a specific purpose. So, their tenure can be short-term or long-term, depending on the task pursued by the company. By and large, the time frame is shorter than bonds.|
10 Key Differences Between Bonds and Debentures in India