Difference Between Debentures and Bonds: Understanding the Basics

When it comes to investments, most people are familiar with the terms “debentures” and “bonds.” However, not everyone is aware of the differences between the two. In this article, we’ll look at the basics of debentures and bonds and how they differ from each other.

What are Debentures?

Debentures are a type of debt instrument that companies use to raise funds from the public. Essentially, a debenture is an unsecured loan that investors give to the company in exchange for periodic interest payments. Debentures have a fixed interest rate, and their maturity period may vary between one to thirty years.

Investors do not hold any collateral against the debentures they purchase. Thus, if the company fails to repay the debenture’s principal and interest on time, the investor’s capital may be at risk. Debentures are an excellent investment option for investors with low-risk appetite and are seeking a predictable income stream.

What are Bonds?

Like debentures, bonds are also debt instruments used by organizations to raise capital. However, there is a crucial difference between the two. A bond is secured against some assets or collateral, while debentures are not. In other words, if the issuer fails to repay the debt, bondholders can sell the collateral attached to the bond to cover their losses.

Unlike debentures, bonds have more extended maturity periods and can be of different types, such as government bonds, corporate bonds, and municipal bonds. Furthermore, bonds usually have a call option, giving the issuer the right to call back or redeem the bond sooner.

Key Differences Between Debentures and Bonds

Now that we have understood the basics of both debentures and bonds, let’s look at their differences:

Security: Debentures are unsecured, and holders do not have any collateral to sell in case of default. Bonds are secured, and bondholders have claim to assets that can be sold to recover losses.

Maturity Period: Debentures have a shorter maturity period, usually ranging from one to thirty years. Bonds have much more extended maturity periods, typically ranging from ten to thirty years.

Interest Rate: Both debentures and bonds have a fixed or floating interest rate, but the interest rates for bonds are generally lower.

Call Options: Bonds have a call option, while debentures do not. A call option means that the issuer has the right to redeem or buy back the bond before its maturity date.

Conclusion

In conclusion, debentures and bonds are both debt instruments that organizations use to raise funds from the public. The significant difference between the two is that debentures are unsecured, while bonds are secured. Moreover, bonds have a more extended maturity period and come with a call option, while debentures have shorter maturity periods and no call options. Individuals should carefully consider their investment goals, risk tolerance, and other factors before deciding to invest in either of these options.

Table difference between debentures and bond

Debentures vs Bonds

Characteristic	Debentures	Bonds
Issuer	Issued by corporations	Issued by corporations, governments, and other entities
Collateral	May be secured or unsecured	May be secured or unsecured
Interest rate	Fixed rate of interest	May have fixed or variable interest rates
Maturity	Long-term	May be short-term or long-term
Priority of payment	Ranked lower than bonds in priority of payment	Ranked higher than debentures in priority of payment