Bonds vs. Debentures: What's the Difference?
Edited by Janet White || By Harlon Moss || Updated on October 22, 2023
Bonds are debt securities backed by collateral, while debentures are unsecured debt instruments.
Key Differences
Bonds represent a debt where the issuer promises to pay back the principal amount with interest. Debentures, on the other hand, are a type of bond that does not have collateral backing, relying purely on the creditworthiness of the issuer.
When investors purchase bonds, they often have a degree of security because these bonds might be backed by specific assets. Debentures don't offer this security, making them a riskier investment, but often they come with a higher yield to compensate for the increased risk.
In terms of hierarchy, if a company goes bankrupt, bondholders are typically paid before debenture holders since bonds may have assets tied to them. Debentures, being unsecured, are at a higher risk in such scenarios.
Bonds might have covenants or conditions tied to them that restrict certain activities of the issuer to protect the bondholder's interest. Debentures, being more flexible, might not come with as many restrictions.
It's essential for investors to be aware of the distinctions. While bonds offer more security, they might offer lower returns. Debentures, with their higher risk, often promise higher returns, but the risk of default is greater.
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Comparison Chart
Collateral
Typically secured by specific assets.
Unsecured, no assets backing them.
Risk
Generally lower risk due to collateral.
Higher risk due to lack of security.
Yield
Often have a lower yield.
Typically offer a higher yield to compensate for risk.
Priority in Bankruptcy
Paid before debenture holders.
Paid after bondholders.
Covenants
May come with restrictive covenants.
Usually fewer restrictions.
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Bonds and Debentures Definitions
Bonds
Debt instruments secured by collateral.
The company issued bonds backed by its physical assets.
Debentures
Unsecured debt instruments.
The firm raised capital by issuing debentures.
Bonds
Can be sold in secondary markets.
She sold her bonds before maturity to access funds.
Debentures
Long-term borrowing instruments.
The company's debentures will mature in 15 years.
Bonds
Instruments with a maturity date.
The 10-year bonds will mature in 2033.
Debentures
Often convertible into equity.
Holders opted to convert their debentures into company shares.
Bonds
Financial tools indicating a debt obligation.
Municipalities often raise funds through bonds.
Debentures
Relies on issuer's creditworthiness.
High-rated companies find it easier to issue debentures.
Bonds
Interest-bearing securities.
Investors receive periodic interest payments on their bonds.
Debentures
Typically offers higher yields.
Due to increased risk, debentures often come with attractive interest rates.
Bonds
Plural of bond
Debentures
A certificate or voucher acknowledging a debt.
Bonds
Imprisonment, captivity
Debentures
An unsecured bond issued by a civil or governmental corporation or agency and backed only by the credit standing of the issuer.
Bonds
The condition of goods in a bonded warehouse until duty is paid
Debentures
A customhouse certificate providing for the payment of a drawback.
Debentures
Plural of debenture
FAQs
Which is riskier, bonds or debentures?
Debentures are riskier as they lack collateral backing.
How are bondholders protected?
Bonds may have assets as collateral and can have covenants to protect holders.
Why might a company issue debentures instead of bonds?
Issuing debentures doesn't require tying up assets as collateral and may offer more flexibility.
Are bonds and debentures the same?
No, bonds are often secured by assets, while debentures are unsecured.
Are bonds and debentures both long-term instruments?
Generally, yes, though the exact maturity can vary.
Are the interest rates the same for bonds and debentures?
Typically, debentures offer higher interest rates to compensate for increased risk.
What happens if a company defaults on a bond or debenture?
Bondholders are usually paid before debenture holders in case of asset liquidation.
Can I sell bonds or debentures before they mature?
Yes, both can be sold in secondary markets.
Can bonds also be unsecured?
While bonds are typically secured, some might be unsecured, resembling debentures.
Why might an investor choose debentures over bonds?
For the potential of higher returns, despite the increased risk.
How do interest payments work for bonds and debentures?
Investors receive periodic interest based on the agreed-upon rate.
How do bonds and debentures impact a company's balance sheet?
They are listed as long-term liabilities.
Are debentures only issued by corporations?
Mostly, but governments can issue types of unsecured debt resembling debentures.
Why are bonds seen as safer investments?
They're often backed by assets and have a lower default risk than debentures.
Can debentures be converted into stock?
Yes, some debentures are convertible into company shares.
What are convertible debentures?
Debentures that can be converted into equity shares at a predetermined rate.
Are there tax benefits associated with bonds or debentures?
It depends on jurisdiction and bond/debenture type. Some government bonds may offer tax benefits.
What is a zero-coupon bond?
It's a bond that doesn't offer periodic interest but is issued at a discount, maturing at face value.
Do bonds and debentures affect a company's equity?
They represent debt, not equity, but convertible debentures can be turned into equity.
How can I assess the risk of a debenture?
Look at the issuer's credit rating, financial health, and market reputation.
About Author
Written by
Harlon MossHarlon is a seasoned quality moderator and accomplished content writer for Difference Wiki. An alumnus of the prestigious University of California, he earned his degree in Computer Science. Leveraging his academic background, Harlon brings a meticulous and informed perspective to his work, ensuring content accuracy and excellence.
Edited by
Janet WhiteJanet White has been an esteemed writer and blogger for Difference Wiki. Holding a Master's degree in Science and Medical Journalism from the prestigious Boston University, she has consistently demonstrated her expertise and passion for her field. When she's not immersed in her work, Janet relishes her time exercising, delving into a good book, and cherishing moments with friends and family.
