Economy Simplified: Difference between Bonds and Debentures

Debt instruments traded on the exchange can be classified into bonds and debentures.

What is Debenture?

1. Debentures are unsecured debt instruments that any company assets or collateral does not back them. 
2. The investors have to rely on the credit ratings of the issuing company as security. Most private companies use debentures as a tool to raise funds for many reasons. 
3. For instance, a company issues debentures when expanding its business.

What are Bonds?

1. Bonds are the most common debt instrument. Usually private companies, governments and other financial institutions issue them. 
2. They are loans that are secured by collateral. 
3. The organization that issues bonds becomes the borrower who promises the repayment of principal and interest at specified maturity date. Also, they fix the interest rate for the duration of the bond’s term.

Difference between Bonds and Debentures

ParametersBonds Debentures
CollateralGenerally, bonds are secured by collateral. CollateralDebentures may or may not be backed by collateral. Thus, investors have to purchase based on the credit rating of these companies.
Tenure The tenure of Bonds is generally longer than debentures. Companies issue debentures for a short or long term period on the basis of their fund requirement
Issued ByMostly large corporations, government agencies, financial institutions, etc. issue bondsMostly private companies issue debentures.
Interest RateBonds offer lower interest rates as there is repayment stability in  future and also collateral backs them. Debentures offer higher interest rates as they are unsecured. Also, the investor relies only on creditworthiness and reputation of the issuer.  
PaymentsThe interest payment on bonds is on an accrual basis, i.e. monthly, half-yearly or annually. The performance of the business does not affect these payments.The payment of interest on debentures is periodical as per the prospectus. However, this depends on the performance of the issuing company.
RiskBonds are safer than debentures as some form of collateral backs them. Also, the issuing party is reviewed periodically and rated by the credit agencies.Debentures are riskier as any collateral does not back them. It is only the reputation of the issuing company and the ratings by credit rating agencies.
ConvertibilityBonds cannot be converted into equity shares of the companyIssuing company can convert only convertible and also partially convertible debentures into equity shares on the expiry as specified in the clause. 
LiquidationDuring company liquidation, Bondholders are given priority over the debenture holders.During liquidation, the debenture holders are paid after the bondholders.

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