One of the most defining features of the securities market in India is its diversity and depth. There are investment options for investors with varying investment goals, timelines, and levels of risk tolerance.
While some market-linked assets carry high risk and a high potential for return, others carry low risk and low yet stable returns.
Fixed income investments are often preferred by investors looking for fixed returns and a low risk exposure. Bonds and debentures are amongst the prominent fixed income securities available in the market.
In this article, we shall discuss the meaning of bonds and debentures, and the key differences between the two debt based instruments.
Bonds And Debentures – Meaning And Key Features
Both bonds and debentures are instruments of debt, that is securities that are issued as a means to secure debt from investors. Let us discuss both these securities and their key features.
Bonds
Bonds are debt instruments issued by entities to raise funds for various purposes, particularly large projects. The issuers of bonds are usually the government and large corporations. When an entity issues bonds, it is termed as the borrower while the bond holder is referred to as the lender.
The return on bonds is based on a predetermined rate of interest declared at the the time of the issuance of the bond. Bonds are secured by collateral, which makes them relatively safe as an investment option. The types of bonds include government bonds and company bonds or corporate bonds.
Debentures
Debentures are debt-based securities that are issued by entities to raise capital. The return on a debenture can be based on a fixed rate of interest or a floating rate of interest. The primary difference between a bond and a debenture is that while the former is secured by the assets of the issuing entity, the latter is essentially unsecured.
As a result, debentures are considered riskier than bonds. Notably, the debenture holders get repaid before the shareholders in the event of the liquidation of a company, but after the dues of the bond holders have been settled. The prominent types of debentures are convertible debentures and non-convertible debentures.
Bonds And Debentures – Prominent Differences
Owing to the fact that bonds and debentures are both debt based instruments, they carry several similarities. However, there is no dearth of differences between the two. The following table highlights the key differences between bonds and debentures.
| Point of difference | Bonds | Debentures |
| Collateral | Bonds are debt securities backed by collateral. | Debentures are debt securities that have no collateral backing them. |
| Risk | Owing to the presence of collateral assets, bonds are considered safer than debentures. | Owing to the fact that they have no collateral, debentures are considered riskier than bonds. |
| Return | Bonds carry a fixed rate of interest which is not contingent upon the performance of the issuing entity (particularly a company). | Debentures carry either a fixed or floating interest rate; the returns on debentures are affected by the performance of of the issuing entity (if it’s a company). |
| Tenure | The tenure of bonds is usually long. | The tenure of debentures is short to medium. |
| Liquidity | Bonds are considered less liquid than debentures owing to their longer tenure. | Debentures are considered more liquid than bonds |
| Suitable for | Bond meaning are suitable for investors seeking stable returns at a low risk exposure. | Debentures are suitable for investors seeking high returns and ready to bear high risk. |
| Priority during liquidation | During the liquidation of a company, its bond holders get priority of repayment over its debenture holders. | During the liquidation of a company, its debenture holders get repaid after its bond holders. |
The Bottomline
We hope this guide on bonds and debentures and the prominent differences between the two popular instruments of debt is helpful to you. It is advisable to ascertain the credibility of the issuer before purchasing bonds and debentures, and check whether the instrument is in line with your investment plan.