Most people first hear these words when they start looking for safe returns. Both are ways to lend money and earn interest. Yet they are not the same. If you understand the small differences you can make smarter bonds investment choices with less confusion.
What is a bond
A bond is a simple loan that you give to a government or a company. They promise to pay you interest on time and return your money on the maturity date. Think of it like you are the bank and they are the borrower. For many people bonds investment feels steady because the cash flows are clear and the rules are usually strict.
What is a debenture
A debenture is also a loan. In India people often use the word debenture when a company borrows from the public. Debentures may or may not be backed by specific assets. The company agrees to pay interest and repay the principal after a fixed period. For an everyday saver this too can be part of bonds investment because the idea is still the same. You lend and you earn interest.
Who issues them and what backs them
Bonds are issued by central or state governments and by public sector units and by companies. Government bonds are backed by the tax power of the government which makes them very safe. Company bonds can be secured by assets like land or equipment or receivables.
Debentures are mostly issued by companies. They can be secured or unsecured. A secured debenture is backed by company assets. An unsecured debenture depends mainly on the overall strength of the company. When you plan any bonds investment always check if the instrument is secured and who stands behind it.
Interest rate and risk
Both pay interest that can be fixed or floating. Government bonds usually offer lower rates because risk is low. Company bonds and debentures may offer higher rates because risk can be higher. Credit rating tells you how safe the payments are likely to be. Higher rating means lower risk and usually a lower return. Never chase rate alone when doing bonds investment. Match the return with your need for safety.
Convertibility and listing
Some debentures can convert into shares after a period. These are called convertible debentures. This adds a bit of equity like flavor. Most plain bonds do not convert into shares. Both bonds and debentures can be listed on exchanges. If they are listed you can sell before maturity if there are buyers. Liquidity can vary so do not assume you can always exit easily.
Tenor and payment style
Both can be short term or long term. Interest may come every month or every quarter or every year. Some pay interest at maturity together with principal. Read the offer document carefully so your cash flow plan is realistic. Good bonds investment is about matching payout dates with your money needs.
Which is better for you
If you want the highest level of safety choose government bonds. If you want a bit more return and can handle some risk choose high rated company bonds or secured debentures. If you are okay with equity style upside you may look at convertible debentures. Keep it simple and diversify. Do not put all your bonds investment into one issuer or one sector.
In short both terms are close cousins. Bonds are the broader family and debentures sit inside that family for many company issues. Know the issuer and the security and the rating and your goal. That is the heart of smart bonds investment.
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