Very often in this financial market, people used the word bonds and debentures as the same, but they are both distinctive. Yes! They are both debt capital but there are differences between them.
What is a Bond? : A Bond is debt instrument in which an investor provide loans to an entity (a corporate or government) which they borrow the fund for their need and pays the lender a fixed or variable interest for definite period of time. Owners of the bond are debt holder or creditor of the borrower.
- It is typically a loan that is secured by a specific physical asset.
What is a debenture?: A debenture is also a type of debt instrument that is only backed up by creditworthiness & reputation of the issuer.
- It is not secured by physical assets or collateral. It is secured only by the issuer’s promise to pay the interest and loan principal.
Hence this is the main difference between them, otherwise both are debt instrument.
[…] Debentures: These are similar to bonds but they are mostly unsecured loans unlike bonds which are secured & backed by assets of the company. Simply put, debenture is a long-term debt instruments used by Government or large companies to obtain funds which are not secured by the any asset. These instruments are little riskier than bonds as they are not backed by any lien of assets. There are some more differences between bonds & debenture which you can read from our earlier blog; https://financialbook.in/2017/05/09/bonds-vs-debentures-whats-the-difference/ […]