Definition of Bonds

A financial instrument which shows the obligation of the borrower towards

the lender is known as Bond. They are created to raise funds for the company
or government. It is a certificate, signifying a contract of indebtedness of the
issuing company, for the amount lent by the bondholders.

In general, bonds are secured by collateral, i.e. an asset is pledged as security

that if the company fails to pay the sum within stipulated time, the holders can
discharge their debts by seizing and selling the asset secured.

Bonds are issued for a fixed period, which carries interest known as ‘coupon.’
The interest needs to be paid at regular intervals, or it will accrue over time.
They are issued by public sector undertaking, government firms, large
corporations, etc. The issue of government bonds is done in auctions where
members bid for the bonds. The principal amount of the bonds is to be paid at
a future specified date known as maturity date. Some common types of bonds
are as under:

 Zero coupon bonds

 Double option bonds
 Option bonds
 Inflation bonds
 Floating rate bonds
 Euro bonds
 Foreign bonds
 Fully Hedged bonds
 Euro convertible zero bonds
 Euro bonds with equity warrants.

Definition of Debentures

A debenture is a debt instrument used for supplementing capital for the

company. It is an agreement between the debenture holder and issuing
company, showing the amount owed by the company towards the debenture
holders. The capital raised is the borrowed capital; that is why the status
of debenture holders is like creditors of the company.

Debentures carry interest, which is to be paid at periodic intervals. The

amount borrowed is to be repaid at the end of the stipulated term, as per the
terms of redemption. The issue of debentures publicly requires credit ratings.
Debentures are classified in the following categories:

 On the basis of Security

o Secured Debentures
o Unsecured Debentures
 On the basis of Convertibility
o Convertible Debentures
o Nonconvertible Debentures
 On the basis of Negotiability
o Registered Debentures
o Bearer Debentures
 On the basis of Permanence
o Redeemable Debentures
o Irredeemable Debentures
 On the basis of Priority
o First Mortgage Debentures
o Second Mortgage Debentures

Key Differences Between Bonds and Debentures

The following are the major differences between bonds and debentures:

1. A financial instrument issued by the government agencies, for raising

capital is known as Bonds. A financial instrument issued by the
companies whether it is public or private for raising capital is known as
Debentures.
2. Bonds are backed by assets. Conversely, the Debentures may or may not
be supported by assets.
3. The interest rate on debentures is higher as compared to bonds.
4. The holder of bonds is known as bondholder whereas the holder of
debentures is known debenture holder.
5. The payment of interest on debentures is done periodically whether the
company has made a profit or not while accrued interest can be paid on
the bonds.
6. The risk factor in bonds is low which is just opposite in the case of
debentures.
7. Bondholders are paid in priority to debenture holders at the time of
liquidation.