What is the difference between Bond and Debenture? | Is Debenture and Bond the Same?
Is Debenture and Bond the Same?
In this article, we cover the difference between Bond and Debenture.
Many people often confuse bonds and debentures. These two terms are used interchangeably and are popular debt-raising instruments. However, there are a few differences that many of us are not aware of. But before discussing the differences. Let’s take a close look at these popular debt instruments.
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Bond
Bond is the most popular debt instrument largely used by private and government organizations. The issuer of the bonds is the borrower. Consequently, the holder of the bond is the lender. Certainly, the borrower raises the debt with a promise to repay this amount at the specified maturity. In addition, declare a fixed rate of interest during the bond’s term. Moreover, bonds are backed by collateral and are considered a more safe form of investment. Generally, wealth manager advises their client to hold a good percentage of bond in their portfolio once they are near retirement age.
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Debenture
Debentures are raised to meet specific purposes to meet the cost of an upcoming project or expand the new business. Most importantly, it is long-term financing used by corporate houses. Debentures can have floating or fixed rates of interest. In addition, the repayable date is listed in the issuing document. However, debentures are not backed by any collateral so little risky as compared to bonds. They are backed solely by the credit ratings of the company.
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Difference between Bond and Debenture
Let’s check out the difference between both asset classes in the debt category:
| Bonds | Debentures |
|---|---|
| Bonds are a secured form of investment backed by collateral. | Debentures can be secured or unsecured. In most cases, public companies issue debentures without any collateral as people have faith in their creditability. |
| Bonds are less risky as backed by collaterals. Hence considered a safe haven for investors. | Debentures carry a higher level of risk as compared to bonds as they are backed solely by the faith and creditability of the issuing party. |
| Bonds are generally issued by government agencies, public companies, financial houses, and large corporates. | Usually, private companies use debentures as a medium of raising funds. |
| Bonds offer a lower rate of interest as backed by collaterals and chances of default are minimal. | Moreover, debentures offer a higher rate of interest as they are unsecured and backed by the faith of the issuing company only. |
| The interest of payment is done on an accrual basis like annually, monthly, or quarterly. Payout is unaffected by the company’s performance. | However, it is mostly periodical. As a result, dividend payout often depends on the performance of the issuing company. |
| Bonds cannot be converted into equity stocks. | On the other hand, debentures can be if it’s mentioned in the circular. |
| The tenure of the bond is long-term. | Debentures are raised for the short term to meet the specific requirement of the business. |
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Bonds and Debentures are debt instruments. Hence, considerably are a safe form of investment to diversify a portfolio. It is suitable for low-risk appetite investors.
But both debt instrument offers better returns as compared to bank fixed deposits. Therefore, in case you’re okay to block your money for long terms and looking for secured returns you can go for Bond/Debentures.
In case of any default, you will still have rights to company assets during the liquidation process.
In short, if you’re looking for little higher returns and ready to take risks then go with debentures. Or else stick with bonds as backed by collaterals. It depends on your risk appetite.
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FAQs
SEBI regulates the debt market for both the public and private sectors.
All debentures can be bonds in a certain way but not all bonds are debentures.
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