Debenture and Bond both are debt instruments provided by large corporations or public companies for raising funds. These are fundraising equipment used for long period of finance purposes. Both of these terms are use interchangeably, though they are significantly different.
One of the prominent difference is :-
Bonds are provided by Government companies or semi-government companies, Large corporations and agencies of the government and debentures are usually provided by private companies.
What Are Bonds and Debentures ?
Bond is an obligating instrument of the lender towards the borrower. In other words, a bond is a proof of obligation from the lender towards paying the amount back to the borrower. It is a certificate by a lender proving his or her indebtedness towards the borrower. The person holding bonds is that company’s bondholder.
Debenture is an unsecured type of financial instrument. It is also a fundraising instrument like bonds but they do not have any security or collateral of the issuer. It depends on the faith of the debenture holder towards the company. The debenture holders are the creditors of the company.
Key Features of Bonds
Bond is a secure form of investment as it has collateral attached. This means the borrowers or bondholders get a charge on assets in case the lender fails to pay them back. The interest rate is also fixed before hand and paid at regular intervals. The rate is also called coupon rate. It is a special tool for retired people for a long term source of interest. The time at which the bond is to be repaid is also known as maturity period.
In time of liquidation of a company bonds get the first priority. They provide less interest as it is less risky.
The interest on bonds is provided on half-yearly basis, yearly basis or a fixed time period. Also the rate of interest is provided regardless of the company’s performance. Bonds cannot be transform to equity shares anytime. It holds a key part in the portfolio of any financial investors and advisors.
Key Features of Debentures
They are less secured in nature as it is a form of borrowed capital. The debenture holders are also referred as creditors. They are provided majorly by private companies. They provide a high rate of interest in comparison to bonds due to high risk associated with it. In times of liquidation companies pay them after the bonds. The rate of interest is high but it completely depends on the performance of the company.
Debentures are provided for specific purposes. Their utilization is for any upcoming major expenses and paying for expansions. Debentures are available in form of convertible debentures and non convertible debentures. The convertible debentures can be transform into equity shares but Non convertible debentures cannot be transform into equity shares.
There are two methods for reimbursement of debentures. One is lump sum amounts and other is in installments. Installments come from the debenture redemption reserve. Such reserve pays the amount in installments to all the debenture holders. All the terms of debentures are present in the underlying documentation.
Comparing Both of Them
| BONDS | DEBENTURES |
| Tenure period is high for them | Tenure period is low in comparison to bonds |
| Carry less risk in comparison to debentures | Carry high risk in comparison to bonds |
| Backed by collateral security. | Not backed by any kind of security or collateral |
| Offer low interest due to less risk added to them | Offer high interest due to higher risk added to them |
| They are bond holders of the company | They are debenture holders of the company (also called creditors for the firm) |
| The payment of interest is done on a timely basis. It is done on an accrual basis. It is unrelated to the company’s performance. | The payment is done monthly or yearly but the payment is not fixed as it is related with performance of the company. |
| Issued by government companies and financial organizations. | Mostly issued by private companies. |
If we look at the U.S. economy, U.S. treasury bonds and U.S. Treasury bills both are debentures. Hence some debentures offered by the government are safe and almost zero risk tools with high interest rates.
At the end both Debentures and Bonds are good tools for investment and if we carefully select our tools and companies then there is high guarantee of constant and high returns.
