Bonds and Debentures - Explained

Bonds and Debentures: If a company or an organization has a requirement of funds, then it has two main options to raise the fund.

Equity
Debt

Equity

Equity financing is a risk capital in which the company dilutes its shareholding. If the company has 100 shares, then the company raises some money by selling 10% of the shares and the company becomes new shareholders of 10%.

So the company in a way 10% sold their share to the new shareholders and the money that came from it could be invested in their business.

Debt

If the company does not want to sell its shares then it can raise debt financing. The simplest example of debt financing is a company can take a loan from the bank.

Second, there is a good option inside it that the company can issue bonds or debentures. In bonds or debentures, like a loan has been taken from the bank, in the same way, a loan is taken from the public here.

So bonds or debentures are only a type of loan within which fixed interest has to be paid to the bond or debenture holder.

But here many people are confused that what is the difference between bonds and debenture. To a large extent, it is similar, there is a slight difference.

Similarities in Bonds and Debentures

Both are a method of long-term financing, for any company and organization. Like a company takes a loan from a bank, then the interest rate has to be given there.

Similarly, if a company is taking money from the public by issuing bonds or debentures, then a fixed interest rate is promised there too.

Along with the fixed interest rate, there is also a fixed time.

If the company is issuing bonds for 5 years or is issuing debenture for 7 years, then this interest is paid, in 5 or 7 years it is also in 2 options.

Either interest payment can be done every year
Or whatever is the maturity period of 5 years or 7 years, it can be paid simultaneously.

Both options are available for both bonds and debentures.

Difference Between Bonds and Debentures

Bonds	Debentures
Bonds are always safe.	Debentures are not safe.
Bonds are always paid first in case of company bankruptcy.	The debentures are paid after the payment of the bonds in case of bankruptcy of the company.
Bonds cannot be converted into shares.	Debentures can be converted into shares.
Anyone can issue bonds such as financial institutions, government, private companies.	But only the private company issues the debenture.

The biggest difference between bonds and debentures is that of security. Bonds are always secure. Secure means that the company keeps any collateral as a security.

For example: If you take a home loan, the bank mortgages your house. If you are not able to pay your home loan, then the bank can now auction your assets and recover them.

Read Also: What is ETF (Exchange Traded Fund)

Similarly, if the company is unable to pay your bond, then the bondholders can be paid by auctioning its assets.

But the debenture that is there can be both secured and unsecured.

Unsecured means that when you take a personal loan, no collateral is kept. When no collateral is placed then the risk increases.

If a debenture is unsecured, it means that its risk has increased.

Now when the risk increases, then the interest rate has to be paid a little more there.

If the debenture is unsecured, then there the company will give you a higher interest rate. If the risk of bonds is low, then the interest rate is also low.

Liquidity

If the financial condition of a company becomes bad, the company is not able to make any payment on time and the losses are getting very high and bankruptcy has happened.

So bondholders are treated like secured loans, so they are always paid first. If the debenture holder is especially unsecured, then his priority comes after the bondholder.

Convertibility

Debentures can be converted into shares, meaning if there is a convertible debenture, then the company can issue shares to all the debenture holders.

Bonds cannot be converted into shares.

So these differences are inside bonds and debentures.

Which company issues bonds and debentures?

Any company can issue bonds such as financial institutions, government, private companies.

But only the private company issues the debenture.

Which company issues bonds and debentures?

Any company can issue bonds such as financial institutions, government, private companies. But only the private company issues the debenture.

What are the Similarities Between Bonds and Debentures?

Both are a method of long-term financing, for any company and organization. Like a company takes a loan from a bank, then the interest rate has to be given there.
Similarly, if a company is taking money from the public by issuing bonds or debentures, then a fixed interest rate is promised there too.
Along with the fixed interest rate, there is also a fixed time.

What is the difference between Bonds and Debentures?

Bonds are always safe. Debentures are not safe.
Anyone can issue bonds such as financial institutions, government, private companies. But only the private company issues the debenture.
Bonds are always paid first in case of company bankruptcy. The debentures are paid after the payment of the bonds in case of bankruptcy of the company.