Debentures are unsecured debt instruments, which a company issues when expanding its business.
On the other hand, bonds are also debt instruments, which is generally issued by private companies, governments, and other financial institutions. The bonds issuing organisation becomes the borrower and it promises the repayment of principal along with interest at a specified maturity date. In addition, such organisations fix the interest rate for the duration of the term of the bond.
Debentures could or could not be backed by collateral. Based on the credit rating of such companies, an investor has to purchase debentures. Generally, bonds are secured by collateral.
Debentures are issued for a short- or long-term period on the basis of the fund requirement of a company. Generally, the tenure of bonds is longer than debentures.
While debentures are mostly issued by private companies issue debenture, bonds are notified by large corporations, government agencies, or financial institutions.
Considering debentures are unsecured, they offer higher interest rates. Also, an investor relies only on the creditworthiness and reputation of the issuer. In the case of bonds, interest rates offered is lower as there is repayment stability in the future, and the collateral backs them.
As per the prospectus, the payment of interest on debentures is periodical. However, it solely depends on the performance of the issuing company. The interest payment on bonds is on an accrual basis, that is, monthly, half-yearly, or annually. The performance of the business has no such influence on payments.
Debentures are comparatively riskier as there is no collateral to back them. It is only the reputation of the issuing company and the ratings by credit rating agencies Bonds remain safer as compared to debentures as there is some form of collateral that backs them. In addition, the issuing party is reviewed on a periodic basis and credit agencies rate them accordingly.
The issuing company can convert only convertible and also partially convertible debentures into equity shares on the expiry as specified in the clause. Bonds, however, cannot be converted into equity shares of the company
However, during liquidation, the debenture holders are paid after the bondholders.
Investors with high-risk tolerance can opt for investing in debentures while a risk-averse investor should choose to put in their money in a bond for long-term investment purposes.
Rajiv is an independent editorial consultant for the last decade. Prior to this, he worked as a full-time journalist associated with various prominent print media houses. In his spare time, he loves to paint on canvas.