Difference between Bonds and Debentures

Bonds are debt financial instruments that both public and private sector companies use to raise funds for their operations. The government agencies, financial institutions as well as private enterprises issue these instruments to investors. Bonds are secured by their physical assets. The holder of these bonds is the lender, while the issuer of these bonds is the borrower. The borrower can issue these bonds to the lender, only by promising to pay back the loan at a specific maturity date with a fixed interest rate. This interest rate is generally lower than debentures because the physical assets of a company secure bonds whereas the debentures are unsecured instruments 

What is a Debenture 

Debentures are also debt financial instruments like bonds. Organisations use these instruments to get funding for their daily needs. They are generally not secured by any physical assets of the issuers, which makes them riskier than bonds. They also carry a fixed or floating interest rate. The debenture holders get first preference over shareholders of a company when it comes to the payment of interests/dividends. The interest rate on debentures is generally higher than bonds because they are not secured by the physical assets of a company 

Key Difference Based on the factors 

Following are some key differences between bonds and debentures based on the various factors: 


Factors Bond Debenture

Bonds are usually secured by the collateral.

Debentures can be secure and unsecured.

Interest Bonds come with a lower interest rate as it is highly stable and secure. Debentures offer a higher interest rate as it does not come with any security.

Owner The bondholder holds the bond.

Debenture holders.

Issued By

Large corporations, financial institutions and government agencies issue these bonds for their long-term capital requirements.

Private companies generally issue debentures for their immediate capital requirements.


Bonds are less risky than debentures because they have the security of the physical assets of the issuing company.

Debentures are riskier than bonds because they do not have the security of the physical assets of the issuing company.


Payments can be made monthly or annually.

Periodic payment depends on the company’s performance in the market.

Priority at liquidation

If the company is on the verge of liquidation, the bondholders are given priority over debenture holders for repayment of capital and interest amount.

If the company is on the verge of liquidation, the debenture holders are given second priority over bondholders for repayment of capital and interest amount.


Bonds are long-term investments than debentures.

Debentures can be a long-term investment depending on the issuing corporation.

  A bond and a debenture are both structures of borrowed capital; however, the distinction comes from within the nature of each instrument. A bond is backed by collateral, whereas a debenture isn’t. However, the scope of earning is usually high with debentures. If you’ve got the flexibility to measure the trustworthiness of the issuer of the debentures, you’ll undoubtedly obtain debentures for a stronger profit. However, if you are new to the sector of an investment, then bonds are a stronger selection for you. 

In the end, the choice will depend on your risk tolerance and financial goals

Idobro Impact Solutions has partnered with Tata Capital to make Financial Literacy accessible for all. For more information on the initiative and to get a deeper knowledge on financial terminology, visit: www.dhangyan.com

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