Though both terms may be used interchangeably but are distinctly different. Bonds are essentially loans secured by a specific physical asset. A debenture is a debt security issued by a corporation not secured by assets but by the Credit rating of the organization. This is a preferred instrument by both governments as well as private organizations.

What is a Bond?

Bond is a debt instrument issued by Government or financial Institution for raising money. Bonds are backed through financial assets and are mostly secured. They are issue to raise capital for specific purpose and are issued for a fixed period. The interest on a bond is paid in regular intervals which are called coupons. 

Let’s say you have bought a bond of Rs.100000 for 5 years at the nominal interest of 8%. So at the end of every month, you will receive a coupon of Rs. 666 and at the end of the period, you will get your Rs. 100000 back. The future date on which your bone period will be over is known as maturity date.

What is a Debenture?

Debenture is also a debt instrument used for fund raising for some more specific purpose like expansion, or working capital need, etc. They are mostly unsecured and are being issued on the basis of debt rating issued be rating agencies. They are not backed by any financial assets so in case of any windup by organization Debenture holders might get paid partly or even might not be paid.

Bond/Debenture Holders v/s Share Holders

A bond or Debenture holders have a higher authority of claiming the assets of the company during the liquidation of the business in comparison to an Equity shareholder or a Preference shareholder. A Bond/ Debenture holders are mere lenders to the company who enjoys a fixed rate of interest and is less bothered about the business scenario. However, a bond or debenture holder does not enjoy any voting rights and participation during the election of a Director or any authority across Business planning or Business strategy. When an investor buys a bond, they are treated as the Creditor of the Business.

Conclusion

While Bond and Debenture may be similar in nature, they are two discrete debt instruments that differ in many ways. While people often get confused between the two and use them interchangeably, it is important to know the differences. After all, the first step towards avoiding investment risks is to always have the pertinent and correct information.