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Difference Between Bond And Debenture

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Investment is one term that relates to almost everyone in this world. Everybody want to invest there surplus money according to there purpose and risk taking capacity. As there are number of investment schemes available in the market which majorly varies in terms of risk and return factor. These are two major factors which influence investors to invest there money, as risky ventures usually offers good returns whereas non risky ventures offers lower returns.

Two options which you can consider as investments are bonds and debentures, these are fixed income instruments which offers good return in the form of interest to the holder of the instrument. Debentures are debt security issued by a company and can be convertible (converted into equity) or non convertible according to the terms and conditions of the debentures. Bonds are certificate of debt issued by companies, organizations or government bodies in order to raise funds. Although both of these instruments are basically loan taken from the investors but varies in terms of repayment conditions.

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What Are Debentures?

Debentures are debt instruments issued by companies to raise there funds for short or medium term. Which means a company can fulfill there short/medium term financial needs by taking loan from the general public by issuing debt instrument, called as debentures. Investors get a fixed rate of interest known as coupon rate in the form of return on there investment in debentures periodically.

Debentures are freely transferable but having a debentures does not make you a shareholder and you do not have the right to vote in the general meetings of the company.

Types of Debentures

Secured Debentures :- Secured debentures are secured against the security of a fixed asset of the company. Which means if the company will not be able to repay the amount of loan taken from the investor, his asset can be sold to repay the liability of the investor.

Unsecured Debentures :- As name suggest these type of debentures are not secured against any company asset. Which means there is no obligation on the company to repay the amount back to the investor when debenture comes due.

Convertible Debentures :- As name suggest these type of debentures can be converted either into equity shares or any other security at a later date.These debentures are either fully convertible or partly convertible depending upon the terms and conditions of the debentures.

Non Convertible Debentures :-  The debentures which cannot be converted into any other securities or shares are called as non convertible debentures. This type of debentures offers higher rate of interest in comparison to convertible debenture.

the other type of debentures includes registered debenture, Bearer debentures, redeemable debentures and irredeemable debentures.

What Are Bonds?

Bonds are contracts issued by companies and government bodies to raise there funds for medium to long term. Which means a company or government organizations can fulfill there medium/long term financial needs by taking loan from the general public by issuing debt instrument, called bonds. Bonds are supposed to be a secured investment but offers low to medium interest rate. It is called as secured investment because if the company goes bankrupt those who hold bonds are the first once to receive there money.

Having a bond does not make you a shareholder and you do not have the right to vote in the general meetings of the company.

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Difference Between Debentures And Bonds
    • Bonds are secured in comparison to debentures
    • Bonds are usually issued by the government bodies while debentures are issued by private companies.
    • Bond offers lower interest rate in comparison to debentures
    • Bondholders do not receive periodic payments and receive the principal plus interest at the end of the term whereas debenture holders receive periodic interest payments.
    • Bond is a long term debt instrument that promises to pay a fixed annual interest over a specific period whereas debenture is a medium term debt instrument.

 

  • Debentures can be convertible into equity shares while bonds are not.

 

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