Debenture vs Bond: What is the Difference?
Whenever you consider investing in fixed-income securities, you are likely to find bonds and debentures as the main choices. Although both banks and loans support raising money and offer interest, they do not have the same level of risk, security, or structure. Learning about the differences between debentures and bonds can guide you towards making better decisions.
What is a Bond?
A bond is a form of debt that organisations such as governments, public companies, or corporations issue to obtain money. Buying a bond means lending your funds to the issuer for the set time specified in the contract. As a result, you earn interest all along the bond period and the money you originally invested as principal is repaid at the maturity date.
Key Features
- They could be secured, meaning they are backed by assets or the government.
- Decrease the probabilities of default.
- A loan may have a fixed or flexible interest rate.
- Usually, issues are from governments or big companies.
Types of Bonds
Here are some main types of bonds -
- Government Bonds - These are part of the government’s debt securities; they present minimal risk.
- Corporate Bonds - Businesses release corporate bonds for the purpose of growing or running their operations.
- Convertible Bonds - The holder can change the bonds to equity shares after the set maturity period.
- Zero-Coupon Bonds - These bonds offer no interest and are bought below their original worth and redeemed at face value.
- Municipal Bonds - Authorities create them to support the building of water resources, bridges, etc.
Also Read: Difference between Corporate Bonds and Government Bonds
What is a Debenture?
A debenture is a type of debt instrument that is used to raise funds from the public/investors. Here, you lend funds to the issuer for a fixed duration in return for regular interest during the period and the principal amount at maturity.
Key Features
- Typically issued by private or public companies, but also issued by governments at times.
- Depositors’ money can earn fixed or floating interest rates that stay the same or change over time.
- There is a chance that they can be converted into equity or not.
Types of Debentures
Here are some types of debentures that you should know about.
- Secured Debentures – Backed by company assets (though less common).
- Unsecured Debentures – Not backed by collateral; riskier.
- Convertible Debentures – Can be converted into equity shares.
- Non-convertible Debentures (NCDs) – Remain as debt instruments until maturity.
- Redeemable Debentures – Have a fixed maturity date.
- Irredeemable Debentures – No fixed maturity; rarely issued today.
Key Differences Between Bonds and Debentures
|
Feature |
Bond |
Debenture |
|---|---|---|
|
Security |
Usually secured |
Typically unsecured |
|
Issuer |
Governments, PSUs, and corporates |
Mostly corporates (private/public) |
|
Risk |
Generally lower (For example - sovereign bonds, government bonds) |
It could be higher, as they may not be secured |
|
Interest Rate |
Usually lower |
Typically higher to compensate for risk |
|
Convertibility |
Can be convertible or non-convertible |
Can be convertible or non-convertible |
|
Investor Type |
Conservative investors |
Risk-tolerant investors |
|
Repayment Priority |
Higher if secured |
Lower compared to secured bonds |
Which is Better: Bond or Debenture?
There is no one-size-fits-all answer. It depends on your risk appetite, investment goals, and timeline:
- You can consider bonds if:
- You seek stable and secure income.
- You prefer low-risk investments.
- You’re investing in government or blue-chip entities.
- You may choose debentures if:
- You are comfortable with higher risk.
- You’re looking for higher interest returns.
- You trust the issuer's credibility and want diversified exposure.
Always remember to check credit ratings issued by agencies like CRISIL, ICRA, or CARE before investing.