Updated June 20, 2023
Difference Between Bonds vs Debenture
To raise capital through borrowings, issuers issue bonds, which are debt instruments backed up by specific physical assets. A bond is a contract between two parties, the issuer, and the issue, with a fixed maturity date. In most cases, a Bondholder benefits from a fixed interest rate periodically. On the other hand, Debentures have no assets or security to support them; rather, they are issued only by the issuer’s promise. Like bonds, a debenture is also treated as a loan instrument.
Let us study much more about Bonds and Debenture in detail:
- In practice, a firm actively uses bonds for short-term capital requirements, a cash crunch, or funding a new project, although they may actively employ them as capital. In short, the tenure of debentures is shorter compared to bonds. The Creditors lend their funds and expect the issuer to pay back once the newly funded projects generate income. However, the creditors expect a rate of interest higher than the Bonds.
- Credit Rating companies rate bonds and the purchase of bonds is fully safe. A bondholder rarely experiences a default. While the faith of the issuer backs up Debentures, which are available through a broker. During the purchase of a Bond or a Debenture, the owner does not get any ownership like Equities.
- But on the other hand, bond or Debenture holders have a higher authority to claim the company’s assets during the liquidation of the business compared to an Equity shareholder or a Preference shareholder. A Bond/ Debenture holders are a mere lender to a company who enjoys a fixed interest rate and is less bothered about the business scenario.
- However, a bond or debenture holder wants to refrain from voting rights and participation during the election of a Director or any authority across Business planning or Business strategy. When investors buy bonds, As the Business’s Creditors, they are dealt with accordingly. Generally, the tenure of the Bonds is more than one year or long-term.
- Categorizing Bonds depends on several factors such as dividend yield, capital gains, and interest rates. Some Bonds, such as municipal bonds, infrastructure bonds, or other state-government bonds, are exempt from taxes. At the same time, any collateral does not back up some unsecured bonds, and the interest rate and a low credit rating are high.
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:
- During the inception of a business, companies generally issue bonds, whereas debentures are given by the company.
- The issuer’s promise backs up debentures, whereas collateral, security, or a physical asset backs up bonds.
- After the maturity period, bonds actively repay the principal amount, whereas debentures actively repay the principal amount after the revenue is derived from the particular project.
- The rate of interest is higher in Debenture in comparison to a bond.
- The Tenure is higher in the case of Bonds in comparison to Debenture.
- The risk factor is lower in the case of bonds in comparison to Debenture.
- Bond payments are periodic; for example, one can pay them in several installments. But Debenture is paid when the business requires funding.
- The bondholder has the highest authority in claiming the assets of the company during liquidation in comparison 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 | Bonds | Debentures |
| Related to | It’s a Debt instrument 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 backed up by physical assets. | This is also a Det instrument, not backed up by any physical asset. Businesses generally issue debentures during a cash crunch, discontinuation of working capital, or the start of a new project. |
| Meaning | The Bond, which periodic in nature, possesses a high rate of security as it is backed up by collateral and offers comparatively low yields. This feature makes it a debt instrument. | A debenture is also a Debt instrument and does not back up by any collateral and the lender lends on the basis of the trustworthiness of the issuer. |
| Tenure | The tenure of Bonds is generally higher in comparison 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 | Most investors regard a Bond as a haven because collateral backs it, and several credit rating agencies periodically rate the business. Again a bondholder has the highest right to the assets. | Similarly, A debenture is less risky than equity, but as physical support does not back it up, it is 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. |
Conclusion
Both Bonds and debenture holders are like lenders to the company that enjoys fixed interest on their capital and does have any impact on the business, unlike the Shareholders. Depending on the business scenario, the holders of Bonds or Debentures convert to Equity. In the modern world, Debt-instrument remains one of the pivotal mediums of capital or fund infusion into the Business.
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