When it comes to understanding the world of corporate finance, there is a lot of terminologies that can be confusing. Two such words are “bonds” and “debentures.” Though they may sound similar, these two concepts have important distinctions. In this blog post, we will break down the key differences between bonds and debentures. Stay tuned!
What is Bond?
A bond is a debt security, like a loan, in which the issuer—usually a corporation, state or local government, or the US government—agrees to pay the holder a specified amount of interest for a specified period of time. The holder then uses the Bond as collateral to borrow money. The Bond market is where Bonds are traded. It is one of the largest and most liquid markets in the world.
The Bond market is made up of dealers who buy and sell Bonds with each other and with their clients. The Bond market is also made up of electronic trading platforms, which allow trading between dealers and investors. The Bond market can be divided into two parts: the primary market and the secondary market. The primary market is where new bonds are issued and sold to investors. The secondary market is where investors trade existing Bonds with each other.
What is Debenture?
A debenture is a type of debt instrument that is not secured by physical assets, but rather by the general creditworthiness and reputation of the issuer. Debentures are issued by companies and governments to raise capital, and typically have a term of more than one year. Interest on debentures is usually payable at fixed intervals, and the principal amount is typically repaid at maturity. Debentures are an important source of long-term financing for many organizations and can be used to finance a wide variety of projects. Debentures are typically issued in public offerings and are traded on secondary markets.
Difference between Bonds and Debentures
Bonds and debentures are both debt instruments that are used by companies to raise capital. Bonds are issued by companies in order to borrow money from investors, with the promise to pay back the principal plus interest at a later date. Debentures are also issued by companies in order to borrow money, but they do not have the same level of security as bonds.
Debentures are backed by the general credit of the borrowing company, rather than by any specific asset. As a result, debentures are often seen as riskier than bonds. However, they also tend to offer higher interest rates, which can make them attractive to investors looking for a higher return.
Conclusion
Bonds and debentures are two different types of debt instruments. A bond is a loan that is made to a government or company, while a debenture is a type of bond that does not have specific security attached to it. Debentures are riskier for investors than bonds because there is no guarantee that the principal or interest will be repaid. However, debentures offer higher yields than bonds, making them an attractive investment option for some investors.
