Almost every organization may need funds and financing in order to set up or expand its business. So, in order to fulfill these requirements, companies go for debt instruments like bonds and debentures. Bonds and debentures are very common discussions in the business world. Despite some of their similarities, they have some differences between them as well. In this blog, we will learn the complete differences between bonds and debentures. This blog has the following main topics.
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Definition Of Bonds
Bonds are the common type of debt instruments mostly used by private companies, large corporations, government agencies, and other institutions in order to raise funds. Bonds are typically secured by a specific physical asset. The holders of the bonds are considered to be lenders and the issuers of the bonds are called the borrowers. The borrower issue the bonds to the lender with the promise of repayment at a specified maturity date with a fixed interest rate.
The bonds are secured by collateral. This means that an asset is pledged as security even if the company went bankrupt to pay the sum at a certain period of time, the holders of the bonds can eject their debts by seizing and selling the asset secured.
Definition Of Debentures
Debentures refer to the debt instruments that are used by the companies in order to issue loans and raise funds. A debenture is secured only by the issuer’s promise to pay the interest and loan principal. Debentures are not backed by any collateral and surety. The interest rate on debentures is comparatively higher than bonds as they are unsecured by the physical assets of the company.
Debentures are freely transferable by the debenture holder. The debenture holders do not have any right to vote in the company’s general meetings of shareholders. The two types of debentures are as follows.
- Convertible Debentures- Convertible debentures are those debentures that can be converted into equity or preference shares in the future.
- Non-Convertible Debentures- The debentures that can be converted into equity and preference are called non-convertible debentures.
Difference Between Bonds And Debentures(Table)
| Basis For Difference | Bonds | Debentures |
| Definition | Bonds are the debt instruments issued by large companies and govt agencies and are backed up by collateral. | Debentures are debt instruments issued by private companies and are not backed up by collateral or any physical assets |
| Owned By | Bondholders | Debentures holders |
| Collateral | Bonds are secured by collateral | Debentures may or may not be secured or backed by collateral |
| Risk | Low | High |
| Tenure | They have a long tenure | Debentures since are short to medium term investments so they have a short tenure |
| Rate Of Interest | Bonds have a low rate of interest | They have a high rate of interests |
| Creditor/Issuer | Bonds are generally issued by large corporations, govt agencies, financial institutions, etc. | They are generally issued by private companies. |
Key Differences Between Bonds And Debentures
Some of the major differences between Bonds And Debentures are as follows.
- Bonds are the common type of debt instruments mostly used by private companies, large corporations, government agencies, and other institutions in order to raise funds. On the other hand, Debentures refer to the debt instruments that are used by the companies in order to issue loans and raise funds.
- Bonds are supported by the physical assets of the companies. On the other hand, Debentures are not backed by assets.
- While the bonds are issued by large corporates and government agencies, and Debentures are actually issued by private companies.
- The interest rate on debentures is higher whereas, on bonds, it is lower.
- The holders of bonds are called bondholders while those who hold debentures are called debentures holders.
Conclusion
So, after reading the above concepts and differences, we can conclude that both bonds and debentures are the types of borrowed capital. The major difference between them is bonds are more secured and backed by collateral as compared to debentures. Bonds are issued by large corporates and government agencies. On the other hand, Debentures are actually issued by private companies.
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