Understanding bond and debenture
Though bond and debenture both are debt instruments, there is considerable difference between these two investment options. Their difference can be highlighted by aspects such as security, interest rate, liability in situations of bankruptcy, receipt of periodical interest and so on.
Today, a person must always plan his future in terms of financial resources. Some of the investment options considered by investors are bonds and debentures. Before highlighting the actual differences, let us first understand the meaning of these two investment options.
What are bonds and debentures?
Primarily, bonds are issued either by companies or by government entities. The companies use this money for expansion or diversification of their business activities. Through these bonds, you actually provide loans to the companies or government. After a definite period of time, you get back your money along with the interest as decided. You are not the owner of the company, but are treated as a lender.
Debentures are issued only by the company for expanding their business. By providing loan to the company, you do not become the owner of the company and cannot take part in the company decisions. You get the facility of transferring your debentures to another person. But these are unsecured loans. Please note that the company will not return your loan amount immediately. You will be given the option of convertibility. If your debentures are convertible, then it will fetch less interest. And if your debentures are non-convertible into equity, then it will earn higher interest rate.
Difference with respect to security
Bonds receive lesser interest rate as compared to debentures. But bonds are more secured. In debentures, the company does not give you collateral and it is a kind of unsecured loan. Hence, even though the rate of interest is higher for debentures, these are less secured than bonds.
Difference with respect to liability
The issue of liability arises in case of bankruptcy situation. Here, we are discussing about the bankruptcy of a company. If a company is becoming bankrupt, then it will first pay to its bondholders. The liability towards debenture holders is less and there are less chances of money getting back for debenture holders.
Difference with respect to payments
This is an important element of difference between debenture and bond. You can plan your finances and future accordingly. You will get a comprehensive idea about when will you get your money back or can you expect regular monthly income from these investment options.
If you are a debenture holder, you will receive interest on regular basis. In addition to this, after the completion of the tenure of debentures, you will receive your principal amount.
On the contrary, if you are a bond holder, then you will not get regular interest. The interest is accumulated with your principal amount. Upon the completion of bond tenure, you will receive your principal amount and the interest accrued. Thus, you will get a large sum of your investment from the company. Also, as these bonds are issued by government entities, you may feel a sense of security.
Conclusively, an investor must understand the differences between bonds and debentures. You must take a suitable decision according to your income level and risk appetite.
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