An Ultimate Guide on Bonds and Debentures
What is a Bond? • •
A bond is a secured investment as it is secured by collaterals. In bonds, an asset is pledged as the security of lending so that if the issuer fails to pay the sum, the bondholders can sell the asset to discharge their debts.
Source: financebuddha.com
Types of Bonds • • • • •
Actively managed bonds Passively managed bonds Open end bond Closed end bond Exchange traded funds
Source: financebuddha.com
What is a Debenture? • •
A debenture is another form of debt fund which is generally unsecured in nature. Debentures are not backed by any of the assets of the issuer hence depends only on the faith factors of the investor on the issuer.
Source: financebuddha.com
Types of Debentures • • • •
Secured debenture Unsecured debenture Convertible debenture Non-convertible debenture
Source: financebuddha.com
BOND VS DEBENTURE – THE KEY DIFFERENCES
Key difference 1 •
•
Bonds are the financial instruments issued by Government agencies and also by Private organizations for raising additional fund from the public. Debentures are issued by private/public companies for raising capital from the investors.
Source: financebuddha.com
Key difference 2 •
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The interest rate of bonds is generally lower than debentures. The lower interest rate depicts the lowrisk factor. On the other hand, debentures give you a highinterest rate but they are unsecured in nature hence the risk factor is more here.
Source: financebuddha.com
Key difference 3 •
•
The interest on a bond is given to the bondholder in monthly, half-yearly or annually. The interest amount never differs as the interest paid is not depended on the performance of the issuer. Adversely, if you buy debentures, your interest rate may be high but the interest payment will be periodic depending on the performance of the issuer.
Source: financebuddha.com
Key difference 4 •
If you own bonds, you can never convert it to equity shares, but debentures can be transferred to equity funds.
Source: financebuddha.com
Key difference 5 • •
When it comes to the tenure period bonds are longterm investments as compared to debentures. However, this mostly depends on the issuing company/body.
Source: financebuddha.com
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