Debentures are unsecured debt instruments that do not have any collateral backing them up. Debentures are used by private firms to raise funds for forthcoming projects, corporate expansion, or to raise short-term cash. Debentures are not issued by the government.
A debenture can have either a fixed or variable interest rate. A fixed interest loan is usually secured by a physical asset, such as real estate. In the event of a payment default, it permits the lender to seize the borrower’s assets and sell them. With a fixed interest rate, the borrower is unable to sell the asset without the approval of the lender.
Bonds are a type of financial instrument that a corporation or government issues to obtain funds. It is a contract between two parties in which the issuer issues a bond with a certain maturity date and the bondholder receives a predetermined rate of interest on a regular basis.
Bonds provide long-term financing, with maturities ranging from one to five years. Government bonds, on the other hand, can be issued for a longer period of time, even up to ten years. Bondholders become the company’s creditors and receive a set interest rate as a source of income.
The state/central government guarantees the bonds issued by government enterprises. As a result, there is a lower likelihood of repayment default.
| Factors | Bond | Debenture |
| Security | Bonds are usually secured by the collateral | Debentures can be secure and unsecured. |
| Interest | Bonds come with a lower interest rate as it is highly stable and secure | Debentures offer a higher interest rate as it does not come with any security. |
| Issuer | The financial institutions, organizations, government agencies, etc. | Debentures are only offered by private companies |
| Riskiness | Bonds are less risky | Higher risk |
| Payments | Payments can be made monthly or annually | Periodic payment depends on the company’s performance in the market. |
| Priority at Liquidation | Bondholders are the priority | Second priority |
| Tenure | Bonds are long-term investments than debentures | Debentures can be a long-term investment depending on the issuing corporation |
Bonds, which are provided by companies and government organizations, may be a great investment for risk-averse individuals. Bond investments can be made at any time. Investors should invest in high-rated bonds for a safe investment. Those who are willing to take a bit more risk might choose a lower-rated debt instrument with greater yields.
The debentures are only offered by private/public firms, which makes them significantly riskier because there is no backup to protect the investor’s money. Debentures, on the other hand, are a good option for investors who want a greater return and are ready to take a risk with their money.