Bonds vs. Debentures — What's the Difference?
By Tayyaba Rehman — Published on October 9, 2023
Bonds vs. Debentures: Bonds are debt securities backed by specific assets or collateral, while debentures are unsecured debt instruments relying on creditworthiness.
Difference Between Bonds and Debentures
Table of Contents
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Key Differences
Bonds are typically debt instruments issued by corporations, municipalities, or governments to raise capital, often secured by specific assets or revenue streams. In contrast, Debentures are a form of long-term debt that doesn't have collateral backing, instead depending on the issuer's general creditworthiness.
When discussing Bonds, they often come with the assurance that, in the event of default, the bondholders can claim certain assets to recover their investments. Debentures, however, offer no such assurance, with holders relying primarily on the issuer's promise and ability to pay.
Investors buying Bonds usually do so with the understanding that their investment has a degree of protection due to the backing of specific assets. Those purchasing Debentures are generally drawn by potentially higher returns, accepting the higher risk associated with unsecured debt.
The market interest rate for Bonds can be slightly lower than that for Debentures, considering the lower risk associated with secured debt. Yet, Debentures often carry a higher interest rate due to the lack of collateral, compensating investors for the added risk.
In the event of bankruptcy, Bonds are given a higher priority in terms of repayment when compared to Debentures. Bondholders are among the first to be repaid, often from the sale of the secured assets, while debenture holders stand further back in the queue.
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Comparison Chart
Collateral
Secured by specific assets or revenue streams.
Unsecured, without collateral.
Risk Level
Generally lower risk.
Higher risk due to lack of security.
Interest Rate
Typically lower interest rate.
Often higher interest rate.
In Case of Default
Can claim certain assets for recovery.
Rely on issuer's creditworthiness without asset claims.
Position in Bankruptcy
Higher priority for repayment.
Lower priority compared to bonds.
Compare with Definitions
Bonds
Debt securities backed by specific assets.
The company issued bonds secured by its manufacturing facilities.
Debentures
Instruments offering potentially higher returns for higher risk.
Investors are attracted to debentures because of their competitive yields.
Bonds
Fixed-income instruments representing a loan to the issuer.
Municipal bonds help cities finance public projects.
Debentures
Long-term debt relying on the issuer's creditworthiness.
Debentures often come with higher interest rates due to their unsecured nature.
Bonds
Obligations promising periodic interest payments and return of principal.
U.S. Treasury Bonds are considered among the safest investments.
Debentures
Debt securities not backed by physical assets.
In case of default, debenture holders can't claim specific assets.
Bonds
Tradable instruments with a specified maturity date.
She decided to sell her 10-year bonds before maturity.
Debentures
Unsecured debt instruments without specific collateral.
The firm raised capital through the issuance of debentures.
Bonds
Debt securities prioritized for repayment in bankruptcy.
In the event of liquidation, bondholders will be paid before stockholders.
Debentures
Obligations based on the general credibility of the issuer.
The company's strong financial position made its debentures attractive to investors.
Bonds
Plural of bond
Debentures
A certificate or voucher acknowledging a debt.
Bonds
Imprisonment, captivity
Debentures
An unsecured bond issued by a civil or governmental corporation or agency and backed only by the credit standing of the issuer.
Bonds
The condition of goods in a bonded warehouse until duty is paid
Debentures
A customhouse certificate providing for the payment of a drawback.
Debentures
Plural of debenture
Common Curiosities
What makes Debentures riskier than Bonds?
Debentures lack collateral backing, making them riskier than bonds which are often secured.
How do Debentures differ from Bonds?
Debentures are unsecured debt instruments, relying solely on the issuer's creditworthiness.
What backs the repayment of Debentures?
Repayment of Debentures is backed by the general creditworthiness and promise of the issuer.
Why might an investor choose Debentures over Bonds?
Debentures might offer higher interest rates to compensate for their unsecured nature.
Which has a higher priority in bankruptcy: Bonds or Debentures?
Bonds typically have a higher repayment priority in bankruptcy compared to Debentures.
Can bondholders claim assets in case of default?
Yes, bondholders can typically claim specific assets or revenue streams tied to the bond.
What happens if a company defaults on its Debentures?
In a default, debenture holders might face losses as they lack specific asset claims and stand behind bondholders in repayment priority.
Can a corporation issue both Bonds and Debentures?
Yes, corporations can issue both, choosing based on their financing needs and the risk appetite of investors.
What are Bonds?
Bonds are debt securities often backed by specific assets or revenue streams.
Are U.S. Treasury securities considered Bonds or Debentures?
U.S. Treasury securities are typically considered bonds, though they are backed by the government's credit rather than specific assets.
Which is a more secure investment: Bonds or Debentures?
Generally, bonds are considered more secure due to their collateral backing, compared to the unsecured nature of Debentures.
Do Bonds always have lower interest rates than Debentures?
Generally, bonds carry lower interest rates due to their secured nature, but market conditions can vary.
Can Debentures be converted into shares?
Some Debentures are convertible, allowing them to be turned into shares of the issuing company under specific conditions.
Why do companies issue Debentures?
Companies might issue Debentures to raise capital without tying up specific assets as collateral.
Do all bonds have collateral?
Not all bonds are collateralized; some rely on the issuer's creditworthiness, similar to Debentures.
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Written by
Tayyaba RehmanTayyaba Rehman is a distinguished writer, currently serving as a primary contributor to askdifference.com. As a researcher in semantics and etymology, Tayyaba's passion for the complexity of languages and their distinctions has found a perfect home on the platform. Tayyaba delves into the intricacies of language, distinguishing between commonly confused words and phrases, thereby providing clarity for readers worldwide.
