Bonds and debentures are both debt instruments used by companies and governments to raise capital from investors. However, there are some key differences between the two:
Definition: A bond is a debt instrument issued by a company or government that pays periodic interest to the investor and has a fixed maturity date, at which point the principal is repaid to the investor. A debenture is also a debt instrument that pays periodic interest, but it is not secured by any specific collateral. Instead, debentures are backed only by the general creditworthiness and reputation of the issuer.
Security: Bonds are often secured by specific assets of the issuer, such as property or equipment, which serve as collateral for the bond. Debentures, on the other hand, are unsecured and are not backed by any specific assets.
Priority: In the event of bankruptcy or default, bondholders have a higher priority in the repayment queue than debenture holders, because bonds are secured by specific assets. This means that bondholders are more likely to be repaid in full, while debenture holders may only receive a portion of their investment back.
As for the types of bonds, there are several, including:
Government bonds: These are issued by national governments to finance their operations and projects.
Corporate bonds: These are issued by companies to raise capital for expansion, acquisitions, or other purposes.
Convertible bonds: These can be converted into a predetermined number of shares of the issuer's stock at a later date, giving investors the potential to earn a profit if the company's stock price rises.
High-yield bonds: These are also known as "junk bonds" because they are issued by companies with lower credit ratings and carry a higher risk of default, but offer higher interest rates to compensate for that risk.
