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Bonds vs. Debentures: What's the Difference?

Edited by Sawaira Riaz || By Sumera Saeed || Updated on October 22, 2023
Bonds are debt securities backed by collateral, while debentures are unsecured debt instruments.

Key Differences

Bonds represent a debt where the issuer promises to pay back the principal amount with interest. Debentures, on the other hand, are a type of bond that does not have collateral backing, relying purely on the creditworthiness of the issuer.
Sumera Saeed
Oct 22, 2023
When investors purchase bonds, they often have a degree of security because these bonds might be backed by specific assets. Debentures don't offer this security, making them a riskier investment, but often they come with a higher yield to compensate for the increased risk.
Sumera Saeed
Oct 22, 2023
In terms of hierarchy, if a company goes bankrupt, bondholders are typically paid before debenture holders since bonds may have assets tied to them. Debentures, being unsecured, are at a higher risk in such scenarios.
Sumera Saeed
Oct 22, 2023
Bonds might have covenants or conditions tied to them that restrict certain activities of the issuer to protect the bondholder's interest. Debentures, being more flexible, might not come with as many restrictions.
Aimie Carlson
Oct 22, 2023
It's essential for investors to be aware of the distinctions. While bonds offer more security, they might offer lower returns. Debentures, with their higher risk, often promise higher returns, but the risk of default is greater.
Harlon Moss
Oct 22, 2023
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Comparison Chart

Collateral

Typically secured by specific assets.
Unsecured, no assets backing them.
Sumera Saeed
Oct 22, 2023

Risk

Generally lower risk due to collateral.
Higher risk due to lack of security.
Sumera Saeed
Oct 22, 2023

Yield

Often have a lower yield.
Typically offer a higher yield to compensate for risk.
Sumera Saeed
Oct 22, 2023

Priority in Bankruptcy

Paid before debenture holders.
Paid after bondholders.
Sara Rehman
Oct 22, 2023

Covenants

May come with restrictive covenants.
Usually fewer restrictions.
Sumera Saeed
Oct 22, 2023
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Bonds and Debentures Definitions

Bonds

Debt instruments secured by collateral.
The company issued bonds backed by its physical assets.
Sawaira Riaz
Oct 22, 2023

Debentures

Unsecured debt instruments.
The firm raised capital by issuing debentures.
Sara Rehman
Oct 22, 2023

Bonds

Can be sold in secondary markets.
She sold her bonds before maturity to access funds.
Sara Rehman
Oct 22, 2023

Debentures

Long-term borrowing instruments.
The company's debentures will mature in 15 years.
Janet White
Oct 22, 2023

Bonds

Instruments with a maturity date.
The 10-year bonds will mature in 2033.
Sumera Saeed
Oct 22, 2023

Debentures

Often convertible into equity.
Holders opted to convert their debentures into company shares.
Harlon Moss
Oct 22, 2023

Bonds

Financial tools indicating a debt obligation.
Municipalities often raise funds through bonds.
Janet White
Oct 22, 2023

Debentures

Relies on issuer's creditworthiness.
High-rated companies find it easier to issue debentures.
Aimie Carlson
Oct 22, 2023

Bonds

Interest-bearing securities.
Investors receive periodic interest payments on their bonds.
Harlon Moss
Oct 22, 2023

Debentures

Typically offers higher yields.
Due to increased risk, debentures often come with attractive interest rates.
Sara Rehman
Oct 22, 2023

Bonds

Plural of bond
Sumera Saeed
Mar 26, 2017

Debentures

A certificate or voucher acknowledging a debt.
Sumera Saeed
Mar 26, 2017

Bonds

Imprisonment, captivity
Sumera Saeed
Mar 26, 2017

Debentures

An unsecured bond issued by a civil or governmental corporation or agency and backed only by the credit standing of the issuer.
Sumera Saeed
Mar 26, 2017

Bonds

The condition of goods in a bonded warehouse until duty is paid
Sumera Saeed
Mar 26, 2017

Debentures

A customhouse certificate providing for the payment of a drawback.
Sumera Saeed
Mar 26, 2017

Debentures

Plural of debenture
Sumera Saeed
Mar 26, 2017

FAQs

Which is riskier, bonds or debentures?

Debentures are riskier as they lack collateral backing.
Sawaira Riaz
Oct 22, 2023

How are bondholders protected?

Bonds may have assets as collateral and can have covenants to protect holders.
Sumera Saeed
Oct 22, 2023

Why might a company issue debentures instead of bonds?

Issuing debentures doesn't require tying up assets as collateral and may offer more flexibility.
Sumera Saeed
Oct 22, 2023

Are bonds and debentures the same?

No, bonds are often secured by assets, while debentures are unsecured.
Sumera Saeed
Oct 22, 2023

Are bonds and debentures both long-term instruments?

Generally, yes, though the exact maturity can vary.
Aimie Carlson
Oct 22, 2023

Are the interest rates the same for bonds and debentures?

Typically, debentures offer higher interest rates to compensate for increased risk.
Janet White
Oct 22, 2023

What happens if a company defaults on a bond or debenture?

Bondholders are usually paid before debenture holders in case of asset liquidation.
Sumera Saeed
Oct 22, 2023

Can I sell bonds or debentures before they mature?

Yes, both can be sold in secondary markets.
Aimie Carlson
Oct 22, 2023

Can bonds also be unsecured?

While bonds are typically secured, some might be unsecured, resembling debentures.
Sumera Saeed
Oct 22, 2023

Why might an investor choose debentures over bonds?

For the potential of higher returns, despite the increased risk.
Sara Rehman
Oct 22, 2023

How do interest payments work for bonds and debentures?

Investors receive periodic interest based on the agreed-upon rate.
Sumera Saeed
Oct 22, 2023

How do bonds and debentures impact a company's balance sheet?

They are listed as long-term liabilities.
Aimie Carlson
Oct 22, 2023

Are debentures only issued by corporations?

Mostly, but governments can issue types of unsecured debt resembling debentures.
Janet White
Oct 22, 2023

Why are bonds seen as safer investments?

They're often backed by assets and have a lower default risk than debentures.
Aimie Carlson
Oct 22, 2023

Can debentures be converted into stock?

Yes, some debentures are convertible into company shares.
Aimie Carlson
Oct 22, 2023

What are convertible debentures?

Debentures that can be converted into equity shares at a predetermined rate.
Harlon Moss
Oct 22, 2023

Are there tax benefits associated with bonds or debentures?

It depends on jurisdiction and bond/debenture type. Some government bonds may offer tax benefits.
Aimie Carlson
Oct 22, 2023

What is a zero-coupon bond?

It's a bond that doesn't offer periodic interest but is issued at a discount, maturing at face value.
Janet White
Oct 22, 2023

Do bonds and debentures affect a company's equity?

They represent debt, not equity, but convertible debentures can be turned into equity.
Janet White
Oct 22, 2023

How can I assess the risk of a debenture?

Look at the issuer's credit rating, financial health, and market reputation.
Sumera Saeed
Oct 22, 2023
About Author
Written by
Sumera Saeed
Sumera is an experienced content writer and editor with a niche in comparative analysis. At Diffeence Wiki, she crafts clear and unbiased comparisons to guide readers in making informed decisions. With a dedication to thorough research and quality, Sumera's work stands out in the digital realm. Off the clock, she enjoys reading and exploring diverse cultures.
Edited by
Sawaira Riaz
Sawaira is a dedicated content editor at difference.wiki, where she meticulously refines articles to ensure clarity and accuracy. With a keen eye for detail, she upholds the site's commitment to delivering insightful and precise content.

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