The key difference between debentures and bonds is that debentures are not backed by collateral and depend on the issuer’s credit standing, whereas bonds are usually secured with specific assets as collateral.
Content:
- Bond Meaning
- What Is Debenture?
- Debentures Vs Bonds
- Difference Between Debentures And Bonds – Quick Summary
- Debentures Vs Bonds – FAQs
Bond Meaning
Bonds are a type of fixed-income instrument that are used to represent a loan that is given by an investor to a borrower. This type of debt is typically a secured form of debt, which means that it is backed by certain assets that belong to the borrower.
Bonds are vital in finance, serving as a tool for governments and corporations to raise capital for projects, operations, or expansion. By issuing bonds, they borrow funds from investors, promising to pay back with periodic interest payments, known as coupon payments, and to return the principal amount upon maturity.
This setup offers investors a stable and predictable income stream, making bonds popular for those seeking regular earnings and lower risk.
What Is Debenture?
Debentures let companies borrow money without offering assets as security, based on trust in the company’s financial strength. If the company can’t pay back, debenture holders get paid only after other secured debts are settled, using the company’s remaining assets.
Imagine a toy company, “FunToys Ltd.,” wants to expand its factory but doesn’t want to use its buildings or machines as collateral for a loan. Instead, it issues debentures, promising to pay back investors from its earnings. People invest because they believe FunToys is doing well and will continue to do so. However, if FunToys runs into financial trouble and can’t pay its debts, the people who bought debentures will only get their money after the bank loans (which were secured by the factory and machines) are paid off. If there’s not enough money left after paying the secured loans, debenture holders might not get fully repaid.
Debentures Vs Bonds
The main distinction between debentures and bonds is that debentures are typically unsecured and only backed by the issuer’s creditworthiness, whereas bonds are typically secured by specific assets as collateral.
| Parameter | Debentures | Bonds |
| Security | Unsecured, backed by issuer’s creditworthiness. | Often secured by specific collateral or assets. |
| Risk | Generally higher risk due to lack of collateral. | Lower risk because of secured backing. |
| Interest Rate | Typically higher to compensate for increased risk. | Generally lower, reflecting the secured nature of the asset. |
| Investor Priority | Lower priority in case of issuer’s liquidation. | Higher priority for repayment in case of liquidation. |
| Suitability | Attractive for investors willing to take more risk for higher returns. | Preferred by risk-averse investors seeking stable returns. |
| Issuer Type | Usually issued by companies needing flexible financing options. | Issued by both corporations and governments. |
| Market Sensitivity | More sensitive to company’s credit changes. | More influenced by interest rate changes and economic conditions. |
To understand the topic and get more information, please read the related stock market articles below.
Difference Between Debentures And Bonds – Quick Summary
- The key difference between debentures and bonds is that debentures are unsecured debt instruments relying on the issuer’s creditworthiness, while bonds are secured by collateral, offering different levels of risk and security to investors.
- Bonds are secured loans that investors give to businesses. They usually come with asset backing, regular interest payments, and a promise to repay the principal at maturity. This creates a steady income stream.
- Debentures allow companies to raise funds without the use of collateral, allowing investors to act as general creditors who trust the company’s financial health while offering higher potential returns at a higher risk than bonds.
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Debentures Vs Bonds – FAQs
The main difference between bonds and debentures is that debentures are usually unsecured and rely on the issuer’s creditworthiness, while bonds are often secured by assets. Debentures carry a higher risk and potentially higher returns, whereas bonds are considered safer with lower returns.
- Convertible Debentures: Can be converted into equity shares after a certain period.
- Non-Convertible Debentures (NCDs): Cannot be converted into shares and typically offer higher interest rates.
- Secured Debentures: Backed by specific assets of the issuer.
- Unsecured Debentures: Not backed by any collateral.
The main benefit of bonds is that they offer stable income with lower risk, making them ideal for conservative investors. Debentures generally offer higher interest rates, making them suitable for investors willing to take on more risk for potentially greater returns.
In India, bonds and debentures are not the same. Bonds are typically issued by government entities and are more secure, while debentures are issued by companies and can be riskier.
The main difference between a bond and a share is that a bond is a debt instrument, where the investor loans money to an entity that pays back with interest, while a share represents ownership in a company.
Whether fixed deposits (FDs) are better than bonds depends on the investor’s risk appetite and financial goals. FDs are generally safer with fixed returns, while bonds can offer higher returns but with more risk.
The main difference between debentures and FD is that debentures are unsecured loans to companies with the potential for higher returns but higher risk, whereas FDs are secure investments with guaranteed returns but typically lower interest rates.
We hope that you are clear about the topic. But there is more to learn and explore when it comes to the stock market, commodity and hence we bring you the important topics and areas that you should know:
