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Difference between bond and debenture

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Bond and Debenture

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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16 COMMENTS

  1. As discussed above, a bond is a loan which is secured by a physical asset whereas, a debenture is secured only by the issuer’s promise to pay the amount along with the interest. One should not think that just because a bond is secured with a physical asset therefore it is safe. This may not be the case. One should always look closely to all the details before making a choice between the two, which are really well explained in the article above. good job Ankita!

  2. Two of the most confusing terms in economic terms-BOND and a DEBENTURE. Bonds are issued either by companies or by government entities. The companies use this money for expansion or diversification of their business activities. Debentures are issued only by the company for expanding their business. Here the differences between both have been described in terms of security,liability and payment.

  3. When it comes about bond and debenture in both of the cases you cannot become an owner of the company but there is a slight difference between those. Bond is all about commitment for period and you will get your money as decided with interest where in debenture you will be having an option of transferring and in this case you will not return your amount immediately .This article has given a good knowledge on these things and it’s cleared my confusions!

  4. Honestly, some terms like Bond, Debentures, equity etc have always complicate things for me.
    How do they work ? What good would they offer ? What would be my liabilities ?
    I think I got all of them answered here. The insights on interests and liabilities were too good.
    All this time, I considered that they both are only issued by Government agencies but “Ankita”, I really appreciate you doing this thorough research. Gracias!

  5. Wow, I really had no idea of the difference between these two.
    I’ve heard so many people talk about bonds – but never debentures! It is nice to know the difference now.
    One question – why would anyone choose debenture over bond if you can get so much more out of a bond, security and high pay? I guess the risk involved is something you really have to consider. I might be more of a risk taker – there is so much more to consider if you own your own company though.
    Now I know the difference in these investment options, I might become a millionaire! Hahaha 🙂

  6. I usually found it really difficult to point out differences between these two entities – bond and debentures. The reason why is because I thought there were very alike and now I discovered that I was wrong the entire time. The security still remains a mystery to me, but I am so glad that I could figure out what’s the purpose of payment as regards a company interest. Thank you!

  7. I found this article so helpful in helping me to understand the differences in levels of security between bonds and debentures – Thank You. Now I know what I would need to take into consideration before deciding to make an investment, based on my preparation for risk.

  8. I liked this article because is easy to read and understand about bond and debenture. Is light and fresh for those who don’t understand these terms very well. I considered it very helpful because we have to know how can we invest our money and take the best of it without any problem.

  9. A well-written article Ankita! I am personally more knowledgeable about bonds than debenture as it is one of the most popular investment options in our country. This article discussing the difference between both investment options is very much helpful for those who plan to start investing their money. Personally though, I think I’m gearing more towards bonds for investment as it is more secure.

  10. I’ve heard people talk about bonds – but never debentures! It is nice to know the difference now.As discussed above, a bond is a loan which is secured by a physical asset whereas, a debenture is secured only by the issuer’s promise to pay the amount along with the interest.Thank You. Now I know what I would need to take into consideration before deciding to make an investment, based on my preparation for risk.
    I Likes this Article because this article simple language and and all points are cleared.
    i like Ankita Patil articles. Good Work……………………………

  11. I was very confused between the terms: bond and debenture. This article really helped me to clear my doubt. The author expressed her opinions in a wonderful manner to bring forward the nuances between two most conflicting terms. I am really happy that my doubt is crystal clear. Bond and debenture now seems easy to understand.

  12. A very well written article, This gives a clear insight on how to invest in the right way. As an HR and my personal investments, this article has been very helpful. I completely get the difference now, and i am sure i can plan my investments accordingly. Bonds and Debentures taught in my accounts was quite confusing, but this has simplified my understanding, and will definitely help me take correct actions in investments. Thank you Ankita 🙂

  13. As I was not from a banking/accounting background, I was totally confused by these terms.Even is searched through the internet and was drown in a pool of information where I couldn’t differentiate between bond and debenture.

    Now I understood the concept and I hope that I can help others to understand the concept either!I am going to take a print of this blog and to save on my drive, Thanks Ankita

  14. Bonds and debentures always sounded synomous. To a common layman like me investment meant just a saving bank a/c. These words bonds, debentures were meant for financial experts. But thanks to this article writter, Ankita that i can understand the difference between the two. The diffrences are well explained with regard to various aspects.

  15. Bonds and debentures are very difficult and confusing to understand. This article helped me understand the concepts. The language used is easy to grasp and made my job lot easier. I am glad that I find this article at the right time. I will revisit and read more articles from this author.

  16. It´s a very unpleasant environment for economy and without changing the way we operate at the moment, no good will come of it. Life is getting more and more like a game of poker. You think that luck and desire will be enough, well think again. Hard work and a lot of learning will make you a pro, otherwise you are just giving away the money for free.

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