Difference between Bonds vs Debenture
Bonds vs Debenture are two different types of Debt instruments which is primarily issued by a Company for the purpose of capital infusion into the Company. Both Bonds vs Debenture are used interchangeably and used as per the current scenario of the Business.
Bonds are a kind of Debt-instrument which are backed up by specific physical assets and are issued with the intention of raising Capital through borrowings. A bond is a contract between two parties viz. the issuer and the issue with a fixed maturity date and in most of the cases, a Bondholder is benefitted with a fixed rate of interest periodically. On the other hand, the issuer is obligated to pay the fixed amount on the date of maturity. When an investor buys a bond, they are treated as the Creditor of the Business. Generally, the tenure of the Bonds is more than one-year or long-term in nature.
Debentures, on the other hand, is not backed up by any assets or security, rather its issued only by the issuer’s promise. Like bonds, a debenture is also treated as a loan instrument. While Bonds can be used as Capital for a company, but in practice, it is used during short-term capital requirement, cash crunch of a company or funding a new project. In short, the tenure is short-term compared to Bonds. The Creditors lends their funds and expects the issuer to pay back once the new funded projects start generating income. However, the creditors expect a rate of interest which is higher than the Bonds.
Purchase of bonds are considered fully safe and bonds are rated by the Credit Rating companies. It is very rare that a bondholder experienced a default. While Debentures are backed up by the faith of the issuer and can be bought through a broker. During the purchase of Bond or a Debenture, the owner does not get any ownership like Equities. But on the other hand, a bond or Debenture holders have a higher authority of claiming the assets of the company during the liquidation of the business in comparison to an Equity shareholder or a Preference shareholder. A Bond/ Debenture holders are mere lenders to the company who enjoys a fixed rate of interest and is less bothered about the business scenario. However, a bond or debenture holder does not enjoy any voting rights, any participation during the election of a Director or any authority across Business planning or Business strategy.
There are several factors upon which the Bonds are categorized such as, dividend yield, capital gains, and interest rate etc. Some Bonds like municipal bonds or infrastructure bonds or other state-government bonds are tax exempted while some unsecured bonds are not backed up by any collateral and the rate of interest is high along with low credit rating.
Bonds vs Debenture Infographics
Below is the top 6 difference between Bonds vs Debenture
Key Differences Bonds vs Debenture
Both Bonds vs Debenture are popular choices in the market; let us discuss some of the major Difference Between Bonds and Debenture:
- Bonds are generally issued during the inception of a business whereas Debentures are issued during the course of the business.
- Bonds are backed up by a collateral or security or a physical asset but Debenture are backed up by the promise made by the issuer.
- The principal amount is repaid by after the maturity period in case of Bonds. In the case of Debenture, the principal amount is repaid after the revenue derives from the particular project.
- The rate of interest is higher in Debenture compare to a bond.
- The Tenure is higher in the case of Bonds compare to Debenture.
- The risk factor is lower in case of bonds compare to Debenture.
- The payment of Bonds are periodical in nature, for example, it can be paid in several installments. But Debenture is paid when the business required funding.
- The Bondholders has the highest authority in claiming the assets of the business during liquidation in compare to the Debenture-holder.
Head To Head Comparison Between Bonds vs Debenture
Below is the topmost Comparison Between Bonds vs Debenture
|The basis Of Comparison Between Bonds vs Debenture||Bonds||Debentures|
|Related to||It’s a Debt instrument and related to the seed-funding of a Business. The Bond buyer is the lender of the Company and enjoys a low rate of return and high security an backed up by physical assets.||This is also a Det instrument and it is not backed up by any physical asset. Generally, a debenture is issued during cash crunch of a business, discontinuation of working capital or starting a new project.|
|Meaning||Bond is a Debt instrument which is backed up by collateral and possess a high rate of security and comparatively low yields and can be periodical in nature.||A debenture is also a Debt instrument and does not back up by any collateral and the lender lends on the basis of trustworthiness of the issuer.|
|Tenure||The tenure of Bonds are generally higher than comparing to Debenture.||The tenure is short-term in nature, based upon the requirement of the business.|
|Calculations||Bonds = Assets – (liabilities+ Share holder’s reserve+ Debentures)||Debentures = Assets – (Liabilities+ Shareholder’s reserve+ Bonds)|
|Risk||In most of the of the cases, a Bond is regarded as a safe haven for investors because it is backed up by collateral and there are several credit rating agencies who rate the business in periodical basis. Again a bondholder has the highest right on the assets.||Similarly, A debenture is less risky compared to an equity but as it is not backed up by a physical asset, it appears marginally higher risk than Bonds.|
|Winding up of Business||Bondholders can claim its right during the liquidation of the Business.||The turn of Debenture holders comes after Bondholders during claiming of their investment.|
Bonds vs Debenture – Final Thoughts
Both Bonds vs debenture holders are like lenders to the company who enjoys fixed interest on their capital and does have any impact on the business, unlike the Shareholders. There are some instances where the Bonds or the Debenture holders are converete to Equity depending upon the scenario of the business. In the modern world, Debt-instrument remains as one of the pivotal medium of capital or fund infusion into the Business.
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This has a been a guide to the top difference between Bonds and Debenture. Here we also discuss the Bonds vs Debenture key differences with infographics, and comparison table. You may also have a look at the following articles –