Difference between Bonds and Debentures

Bonds and debentures are both types of debt instruments used by entities to raise capital from investors, but they differ in several key aspects. Here are the main differences between bonds and debentures:

 

1. Issuer Type:

   • Bonds: Bonds can be issued by various entities, including governments, corporations, municipalities, and government agencies.
   • Debentures: Debentures are typically issued by corporations or companies. While bonds can be issued by any entity, debentures specifically refer to corporate debt instruments.

2. Security:

   • Bonds: Bonds can be either secured or unsecured. Secured bonds are backed by specific collateral or assets of the issuer, providing additional security to bondholders. Unsecured bonds, also known as debenture bonds, are not backed by any collateral and rely solely on the creditworthiness of the issuer.
   • Debentures: Debentures are generally unsecured, meaning they are not backed by any specific collateral. However, some debentures may be secured by a general claim on the issuer's assets, ranking below secured creditors but above equity holders in the event of liquidation.

3. Conversion Feature:

   • Bonds: Bonds typically do not have a conversion feature, meaning they cannot be converted into equity shares of the issuing company.
   • Debentures: Some debentures may have a conversion feature, allowing debenture holders to convert their debentures into equity shares of the issuing company at a predetermined conversion ratio and price. Convertible debentures offer the potential for capital appreciation if the issuer's stock price rises.

4. Regulatory Treatment:

   • Bonds: Bonds are subject to regulatory oversight and may be issued in compliance with specific regulations and guidelines set forth by regulatory authorities.
   • Debentures: Debentures are also subject to regulatory oversight but may have different regulatory requirements compared to bonds, depending on the jurisdiction and the type of issuer.

5. Marketability:

   • Bonds: Bonds are typically more liquid and marketable compared to debentures, especially government and high-quality corporate bonds that are actively traded in the secondary market.
   • Debentures: Debentures may be less liquid and marketable than bonds, especially if they are issued by smaller or less well-known companies. However, debentures issued by large corporations with strong credit ratings may be relatively liquid and actively traded.

6. Usage of Term:

   • Bonds: The term "bonds" is a broader category that encompasses various types of debt instruments issued by governments, corporations, municipalities, and other entities.
   • Debentures: The term "debentures" specifically refers to unsecured corporate debt instruments issued by companies to raise capital from investors.

 

In summary, while both bonds and debentures are debt instruments used by entities to raise capital, they differ in terms of issuer type, security, conversion features, regulatory treatment, marketability, and usage of the term. Debentures are a specific type of corporate bond that is typically unsecured and may offer certain features such as conversion into equity shares.

 

 

Thank you,