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Difference Between Bonds and Debentures

All types of companies, be it small enterprise, established company, or even the government, require financing for their business operations.

Borrowing funds through loans is one of the common ways to get additional funds. Amongst the various ways to borrow money, Bonds and Debentures are the prominent ones. Both are debt instruments issued by the Government or companies. The institution raises capital by selling bonds whereas the investors get the assurance of fixed income as interest and principal capital repayment. Depending on the nature of these contracts, features offered are of various types. Let’s look closely at what they mean, how they work and the key difference between bonds and debentures.

All types of companies, be it small enterprise, established company, or even the government, require financing for their business operations.

Borrowing funds through loans is one of the common ways to get additional funds. Amongst the various ways to borrow money, Bonds and Debentures are the prominent ones. Both are debt instruments issued by the Government or companies. The institution raises capital by selling bonds whereas the investors get the assurance of fixed returns as interest and principal capital repayment. Depending on the nature of these contracts, features offered are of various types. Let’s look closely at what they mean, how they work and the key difference between bonds and debentures.

Bond Meaning

Bond is the most common type of debt instrument issued by the government, large corporations, or agencies of the government to raise capital.

The borrower uses this money to fund its operations, and the investors are entitled to receive interest on their investment. Bonds fall under the fixed-income class.

Bonds are generally considered a relatively safe investment. It pays its investors a fixed rate of return periodically. A bond’s market value may change over time. Callable , Fixed-rate, Floating-rate, Zero Coupon, and Puttable Bonds are some of the common varieties of bonds available for investors.

Debentures Meaning

A debenture is an unsecured debt instrument that isn’t secured by collateral. Private companies use debentures to raise capital for business expansion, upcoming projects, or for raising short-term capital.

Since the debenture is not secured by collateral, the backing is provided through its creditworthiness reflected through the credit ratings and issuer’s reputation.

Difference Between Bonds and Debentures

Are you thinking what is the difference between bonds and debentures? Here it is. Bonds are secured by their physical assets, unlike Debentures. As bonds are backed by collateral, they carry a lower risk when compared to Debentures, which carry a comparatively higher risk. Know the difference between bonds vs debentures.

 

Bonds

Debentures

DefinitionBonds are debt financial instruments issued by financial institutions, big corporations, and government agencies having the backing of collaterals and physical assets.Debentures are debt financial instruments issued by private companies but are not backed by any collaterals or physical assets.
OwnerA bond owner is known as a bondholder.A debenture owner is known as a debenture holder.
TenureThe tenure is longer.The tenure will be comparatively shorter.
RiskThe risk level is lower as it is backed by collaterals.The risk level is comparatively higher since it’s not backed by any collateral.
CollateralBonds are generally secured by the collateral or physical assets of the issuing company.Debentures are unsecured and are not backed by any collateral. The creditworthiness and reputation of the issuer play a key role in backing.

Who Should Invest in Bonds & Debentures?

Investors who are risk averse should invest in bonds. Bonds carry less risk and are considered to be safer investments than debentures.

Also, bonds are good as long-term investment options as it gives fixed interest payment and the principal at pre-specified durations. Also, they are backed by collateral, unlike debentures which is the main difference between bonds and debentures.

However, investment in debentures can offer comparatively higher returns to investors than bonds. Debentures can be good as a short-term investment option. After weighing both the pros and cons of the two, it’s up to you to decide whether you want to invest in bonds or debentures based on your investment objectives.

There are various types of bonds that are issued by financial institutions, government agencies, and corporations. They can differ in the features being offered, the coupon rates and additional attributes that can suit different investors:-

  • Callable Bond
  • Puttable Bond
  • Convertible Bond
  • Zero Coupon Bond

How can I stay updated with the latest investments in Bonds and Debentures?

For the most convenient and comprehensive updates, download the Bajaj Broking app. It provides real-time information, expert analysis, and personalized investment recommendations, ensuring you never miss an opportunity in the bond and debenture markets.

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The information on this website is provided on "AS IS" basis. Bajaj Broking (BFSL) does not warrant the accuracy of the information given herein, either expressly or impliedly, for any particular purpose and expressly disclaims any warranties of merchantability or suitability for any particular purpose. While BFSL strives to ensure accuracy, it does not guarantee the completeness, reliability, or timeliness of the information. Users are advised to independently verify details and stay updated with any changes.

The information provided on this website is for general informational purposes only and is subject to change without prior notice. BFSL shall not be responsible for any consequences arising from reliance on the information provided herein and shall not be held responsible for all or any actions that may subsequently result in any loss, damage and or liability. Interest rates, fees, and charges etc., are revised from time to time, for the latest details please refer to our Pricing page.

Neither the information, nor any opinion contained in this website constitutes a solicitation or offer by BFSL or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service.

BFSL is acting as distributor for non-broking products/ services such as IPO, Mutual Fund, Insurance, PMS, and NPS. These are not Exchange Traded Products. For more details on risk factors, terms and conditions please read the sales brochure carefully before investing.

Investments in the securities market are subject to market risk, read all related documents carefully before investing. This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.

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