Bonds vs. Debenture — What's the Difference?
Edited by Tayyaba Rehman — By Urooj Arif — Updated on May 15, 2024
Bonds are secured debt instruments backed by specific assets, while debentures are unsecured debt instruments relying on the issuer's creditworthiness.
Difference Between Bonds and Debenture
Table of Contents
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Key Differences
Bonds are debt instruments issued by corporations, municipalities, or governments and are secured by specific assets. This means that if the issuer defaults, bondholders have a claim on the designated assets. Bonds typically have lower risk due to this collateral backing. Debentures, on the other hand, are unsecured debt instruments, meaning they are not backed by physical assets or collateral. Instead, debentures rely solely on the creditworthiness and reputation of the issuer. This generally makes debentures riskier compared to bonds.
Bonds often come with fixed interest rates and pay interest regularly, providing a predictable income stream to investors. These features make bonds attractive to conservative investors looking for stability and lower risk. Debentures may offer either fixed or floating interest rates, and they tend to provide higher interest rates to compensate for the increased risk. Investors in debentures typically seek higher returns and are willing to accept the higher risk associated with unsecured debt.
The issuance process for bonds involves rigorous regulatory requirements and the need for collateral, which can limit the ability of some companies to issue bonds. Conversely, debentures can be issued with fewer regulatory hurdles, making them more accessible for companies needing to raise capital without pledging assets.
In terms of duration, bonds can vary widely in their maturity dates, ranging from short-term to long-term, providing flexibility to both issuers and investors. Debentures usually have longer maturity periods, appealing to investors who are looking for long-term investment opportunities with potentially higher returns.
Comparison Chart
Collateral
Secured by specific assets
Unsecured, no collateral
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Risk Level
Lower risk due to asset backing
Higher risk, based on issuer credit
Interest Rates
Typically fixed
Can be fixed or floating
Issuance Process
More regulatory requirements
Fewer regulatory hurdles
Maturity Period
Varies from short to long-term
Usually long-term
Compare with Definitions
Bonds
A financial security backed by collateral.
The company issued bonds secured by its real estate assets.
Debenture
Relies on the issuer's creditworthiness.
Investors purchased debentures based on the company’s strong credit rating.
Bonds
Pays regular interest payments to investors.
Government bonds provide a stable income stream for retirees.
Debenture
Typically issued with longer maturity periods.
The firm’s debentures will mature in 15 years, offering long-term returns.
Bonds
Issued by companies to raise capital for business activities.
The tech firm raised funds through corporate bonds for its new project.
Debenture
Compensates for the lack of collateral with higher returns.
The debentures offered a higher interest rate compared to the secured bonds.
Bonds
Debt securities issued by national or local governments.
U.S. Treasury bonds are considered very safe investments.
Debenture
Can be converted into equity shares of the issuing company.
The convertible debentures can be exchanged for company stock after five years.
Bonds
Issued by local authorities for public projects.
The city issued municipal bonds to finance the new library.
Debenture
In corporate finance, a debenture is a medium- to long-term debt instrument used by large companies to borrow money, at a fixed rate of interest. The legal term "debenture" originally referred to a document that either creates a debt or acknowledges it, but in some countries the term is now used interchangeably with bond, loan stock or note.
Bonds
Plural of bond
Debenture
A certificate or voucher acknowledging a debt.
Bonds
Imprisonment, captivity
Debenture
An unsecured bond issued by a civil or governmental corporation or agency and backed only by the credit standing of the issuer.
Bonds
The condition of goods in a bonded warehouse until duty is paid
Debenture
A customhouse certificate providing for the payment of a drawback.
Debenture
A certificate that certifies an amount of money owed to someone; a certificate of indebtedness.
Debenture
(obsolete) A certificate of a loan made to the government; a government bond.
Debenture
A type of debt instrument secured only by the general credit or promise to pay of the issuer, not involving any physical assets or collateral, now commonly issued by large, well established corporations with adequate credit ratings.
Debenture
A document granting lenders a charge over a borrower’s physical assets, giving them a means to collect a debt, as part of a secured loan.
Debenture
A writing acknowledging a debt; a writing or certificate signed by a public officer, as evidence of a debt due to some person; the sum thus due.
Debenture
A customhouse certificate entitling an exporter of imported goods to a drawback of duties paid on their importation.
Debenture
Any of various instruments issued, esp. by corporations, as evidences of debt. Such instruments (often called debenture bonds) are generally, through not necessarily, under seal, and are usually secured by a mortgage or other charge upon property; they may be registered or unregistered. A debenture secured by a mortgage on specific property is called a mortgage debenture; one secured by a floating charge (which see), a floating debenture; one not secured by any charge a naked debenture. In general the term debenture in British usage designates any security issued by companies other than their shares, including, therefore, what are in the United States commonly called bonds. When used in the United States debenture generally designates an instrument secured by a floating charge junior to other charges secured by fixed mortgages, or, specif., one of a series of securities secured by a group of securities held in trust for the benefit of the debenture holders.
Debenture
A bond that is backed by the credit of the issuer but not by any specific collateral
Debenture
A certificate or voucher acknowledging a debt
Debenture
A financial security not backed by physical assets.
The company raised capital through debentures without pledging assets.
Common Curiosities
What is a bond?
A bond is a secured debt instrument backed by specific assets, offering regular interest payments to investors.
What is a debenture?
A debenture is an unsecured debt instrument relying on the issuer's creditworthiness, often with higher interest rates.
How do bonds and debentures differ in terms of collateral?
Bonds are secured by collateral, while debentures are unsecured.
Do bonds have different maturity periods?
Yes, bonds can range from short-term to long-term maturities.
Why might an investor choose a bond over a debenture?
Investors might prefer bonds for their lower risk and predictable income.
What happens if an issuer defaults on a bond?
Bondholders can claim the designated collateral.
Which is riskier, bonds or debentures?
Debentures are riskier because they lack collateral, unlike bonds.
Can debentures have fixed interest rates?
Yes, debentures can have fixed or floating interest rates.
What is a convertible debenture?
A convertible debenture can be converted into equity shares of the issuing company.
What regulatory requirements apply to bonds?
Bonds often have rigorous regulatory requirements and need collateral.
What types of bonds are there?
Types include government bonds, corporate bonds, and municipal bonds.
How do bonds provide income to investors?
Bonds provide regular interest payments, known as coupon payments.
Are debentures typically long-term investments?
Yes, debentures usually have longer maturity periods.
Why do debentures offer higher interest rates?
They offer higher rates to compensate for the increased risk due to lack of collateral.
Can companies with weaker credit issue bonds?
It is more challenging for companies with weaker credit to issue bonds due to the need for collateral and regulatory compliance.
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Written by
Urooj ArifUrooj is a skilled content writer at Ask Difference, known for her exceptional ability to simplify complex topics into engaging and informative content. With a passion for research and a flair for clear, concise writing, she consistently delivers articles that resonate with our diverse audience.
Edited by
Tayyaba RehmanTayyaba Rehman is a distinguished writer, currently serving as a primary contributor to askdifference.com. As a researcher in semantics and etymology, Tayyaba's passion for the complexity of languages and their distinctions has found a perfect home on the platform. Tayyaba delves into the intricacies of language, distinguishing between commonly confused words and phrases, thereby providing clarity for readers worldwide.
