Bonds are certificates that the government or a public company issues from time to time, with the benefit of repaying the money after some time with increased interest on the borrowed money whereas Debentures are long-term security document that has a fixed rate of interest on yielding and comes from a private company that gets secured against the assets of a person.
Bonds vs. Debentures
To expand the business or to set establish it, the capital is always required which can do certain required tasks by the entrepreneur. When a company, firm or entrepreneur raises the capital, the process is known as the financing in the business language. The money or the services are raised either by issuing debt or by offering equity instruments. Both the ways are handy for the companies to raise the capital. When we talk about the debt instruments for raising the capital, mainly there are two types of sources; one of them is the bond, and the other one is the debenture. In many of the countries, people think that both these sources of external financing are quite the same, but actually, they are not. The bonds are issued by the government to the companies for raising capital, and the collateral secures them. On the other hand, debentures are issued by the companies either the public or the private to meet up the capital required for expansions or other expenses; it is usually for short to medium term.
Bonds become the most used type of debt instrument used as an IOU between the government and purchaser. On the other hand, debentures are not used as commonly and have restricted purpose when compared to bonds. The collateral also plays a significant role, for a surety they have the provision of security through them. On the other hand, debentures may or may not get secured through collateral. The interest rate provided on the bonds is not that much, and therefore they have become familiar as it suits the issuer. On the other hand, the interest rate for debentures becomes much higher as it only comes after a long time. The issuer of a bond has different entities involved, and some of them include Government Agencies, financial institutions, corporations, and others. On the other hand, a debenture mostly comes from a company who want their shares to get recognized. The risk factor associated with the bonds stays much quiet, on the other hand, the risk factor associated with debenture remains much higher.
What are Bonds?
The bonds are the financial instrument issued by the government to the companies, firms or entrepreneur so they can go for the expansions or bear the expenses. The bonds issued by the government gives rise in the capital of the company, and the company can use it as like the loan lent by the lender to the borrower. No equity share is offered to the government, and collaterals are submitted by the companies interested to get the bonds. The borrower, which can be the company or the entrepreneur himself in the case has to incur low-interest rate on the debt and at the same time, they are issued for the longer time or extended time as compared to the debentures. The concept of bonds have expanded worldwide, and governments of different nations have actively set the agencies, corporations and financial issue nationwide so the companies can get financed. The bonds are issued for the ‘definite period, ’ and the interest incurred on it is known as the ‘coupon’; if the company fails to pay them within the decided time, then the payment will accrue over time. The assets are must be pledged by the companies or surety is given by some other reputable firm on behalf of the company looking to get financed through bonds.
What are Debentures?
The debentures are the financial instrument that is raised by the companies, either the private or the public institute. In other words, we can say that it is the kind of the loan which is raised by the private or public companies to the company, which requires capital to meet their financial needs. The companies incur the higher interest, and the return payments are made at the periodic intervals. The debentures are called the unsecured loan as companies are not bound to pay back the principal amount at the time of the maturity, and at the same time, mostly no assets of the company taking debenture are pledged by the financing company before the payment. There can be two types of debentures, one of them is the convertible debenture, and the other one is the nonconvertible debenture. The convertible debenture can be later converted into equity share in the company, whereas the inconvertible does not convert and incurs the higher interest rates.
- Bond is the financial instrument issued by the government organizations or agencies to the companies so that they could meet their financial needs. On the other hand, debentures are the financial instrument that is presented by the private or public companies.
- The payments are secured by collateral in bonds while mostly no collateral or asset pledge takes place in the debentures.
- The bonds are for the higher period, and the companies incur low-interest rate on them. Conversely, debentures are for the lower period, and the companies incur high interest.
- The company getting the bond is known as the bondholder, whereas the company getting the debenture is known as the debenture holder.
- The accrued interest can be paid in the case of late repayments in the bonds. Contrary to this, debentures support the periodical payments inclusive of interests, even when the company has not made any profit.