difference between bonds and debentures

7 Key Difference between Bonds and Debentures

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Any organisation whether they are Public, Private or Government entity requires funds for different purposes like infrastructure development, day to day expenses, expansion of operations or setting up a new project.

There is two way to meet their requirements of funds for any type of entities – Debt Funds and Equity Funds. In the case of debt funds, the organisations don’t require to dilute ownership to raise funds, unlike equity funds.

In fact, Bonds and Debentures both are the instruments of debt funds which are issued by the corporates and Government enterprises to raise funds from the public.

Even if, bonds and debentures are debt instruments still there are some key difference between bonds and debentures which are compared below.

Bonds vs Debentures (Comparison Table):

Comparison AspectsBondsDebentures
Issued byGovernment & Public Sector CompaniesPrivate Companies
TenureLong TenureShort and Medium Tenure
Security Always SecuredMay or may not be secured
RisksLess RiskyMore Risky
Interest RateLower rate of InterestHigher rate of Interest
LiquidationGiven prioritycomparetively less
ConvertibilityCan not be converted to Equity SharesCan be converted to Equity Shares

Difference between Bonds and Debentures:

Bonds and Debentures can be differentiated on the basis of  7 aspects as follows.

1) Who issues Bonds or debentures?

Bonds are mostly issued by the government entities and public sector companies whereas Debentures are issued by the private sector companies.

2) Tenure:

Bonds are issued for longer tenure whereas debentures can be issued for short, medium and long term tenure.

3) Security:

Bonds are always backed up by collateral such as physical assets or other security, on the other hand, debentures may or may not be secured.

4) Risk Measures:

Since Bonds are always secured as compared to debenture, hence are less risky than debentures.

5) Interest Rates:

Although both Bonds and debentures offer fixed interest rates, yet the bonds provide a lower rate of interest as compared to debentures.

6) Liquidation:

Bondholders are given priority when it comes to liquidation whereas debenture holders are not as much. 

7) Convertibility:

Bonds can’t be converted to equity shares, on the other hand, debentures can be converted to equity shares after a certain time period.

Conclusion:

We can conclude from the above comparison table that bonds are more secure than debentures when it comes to security conversely it is less profitable than debentures when it comes to profitability on the investment. Thus one can invest in bonds who are much concerned about security whereas one who is able to take the risk can invest in debentures to gain more returns.

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source: RBI

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