Difference Between Bonds and Debentures

All types of companies, be it small enterprise, established company, or even the government, requires financing for their business operations.

Borrowing funds through loans is one of the common ways to get additional funds. Amongst the various ways to borrow money, Bonds and Debentures are the prominent ones. Both are debt instruments issued by the Government or companies. The institution raises capital by selling bonds whereas the investors get the assurance of fixed returns as interest and principal capital repayment. Depending on the nature of these contracts, features offered they are of various types. Let’s look closely what they mean and how they work.

Bond Meaning

Bond is the most common type of debt instrument issued by the government, large corporations, or agencies of the government to raise capital.

The borrower uses this money to fund its operations, and the investors are entitled to receive interest on their investment. Bonds fall under the fixed-income class.

Bonds are generally considered a relatively safe investment. It pays its investors a fixed rate of return periodically. A bond’s market value may change over time. Callable, Fixed-rate, Floating-rate, Zero Coupon, and Puttable Bonds are some of the common varieties of bonds available for investors.

Debentures Meaning

A debenture is an unsecured debt instrument that isn’t secured by collateral. Private companies use debentures to raise capital for business expansion, upcoming projects, or for raising short-term capital.

Since the debenture is not secured by collateral, the backing is provided through its creditworthiness reflected through the credit ratings and issuer’s reputation.

Bonds & Debentures - Differences

Bonds are secured by their physical assets, unlike Debentures. As bonds are backed by collateral, they carry a lower risk when compared to Debentures, which carry a comparatively higher risk.

Who Should Invest in Bonds & Debentures?

Investors who are risk averse should invest in bonds. Bonds carry less risk and are considered to be safer investments than debentures.

Also, bonds are good as long-term investment options as it gives fixed interest payment and the principal at pre-specified durations. Also, they are backed by collateral, unlike debentures.

However, investment in debentures can offer comparatively higher returns to investors than bonds. Debentures can be good as a short-term investment option. After weighing both the pros and cons of the two, it’s up to you to decide whether you want to invest in bonds or debentures based on your investment objectives.