Difference Between Bonds and Debentures in Tabular Form
Understanding the difference between bonds and debentures is essential in accounting and financial management. This topic comes up often in school exams, competitive tests like UPSC, and also helps in daily business or investment decisions. Learning the key differences and uses of these financial instruments makes concepts in commerce clear and practical.
| Aspect | Bonds | Debentures |
|---|---|---|
| Definition | Secured debt instruments issued to raise long-term funds. | Unsecured debt instruments, often issued by companies to raise capital. |
| Security | Usually secured by company or government assets. | Generally unsecured (may be secured in rare cases). |
| Issuer | Government, public sector, and large corporations. | Mainly private companies. |
| Interest Rate | Lower (due to lower risk). | Higher (due to higher risk). |
| Risk Level | Low risk for investors. | Higher risk for investors. |
| Convertibility | Usually non-convertible. | May be convertible into shares. |
| Priority at Liquidation | Higher than debentures and shareholders. | Just above shareholders, below bondholders. |
| Example | Government of India Bonds, SBI Bonds | Reliance Industries Debentures, Tata Motors Debentures |
Difference Between Bonds and Debentures
The difference between bonds and debentures lies in their level of security, type of issuer, risk, and return. Both are fixed income securities, but they serve varied purposes in the financial market and present different risk levels for investors. At Vedantu, we help you understand these distinctions for better exam preparation and financial awareness.
Features of Bonds
Bonds are popular debt instruments in financial markets. They are preferred by investors looking for regular income with minimal risk. Here are some key features:
- Issued by government bodies or reputed companies
- Backed by assets, making them secure investments
- Usually have fixed or floating coupon interest rates
- Long tenure—often 5, 10, or more years
- Lower interest rates compared to unsecured debt
- Can be traded in the capital market
- Suitable for risk-averse investors
Features of Debentures
Debentures are widely used by companies in India to fulfill their funding needs. They differ from bonds on several counts:
- Often unsecured, without asset backing
- Issued by private or public companies
- Can be convertible (into shares) or non-convertible
- Offer higher interest rates to compensate for risk
- Shorter or medium-term maturity possible
- Interest paid is a company liability, tax deductible
Types of Debentures
Debentures can be classified based on security, convertibility, and tenure. For detailed classification, refer to Types of Debentures.
Bonds and Debentures in India: Examples and Usage
In India, government bonds such as the Government of India Savings Bonds are considered very safe. Large banks like SBI issue bonds too. Companies such as Reliance and Tata Motors regularly issue debentures to raise funds. Both instruments are crucial to the Indian financial market and provide investment avenues for different risk profiles.
When to Use Bonds or Debentures?
For exam questions, remember: If the question is about safety and government involvement, bonds are the answer. If flexibility, higher risk, and corporate borrowing are the focus, choose debentures. For business practice, companies select instruments based on their security needs, fundraising targets, and investor preference.
Key Points for Exams and Revision
- Bonds are secured, debentures are generally unsecured
- Bonds are issued by government and big companies; debentures by companies only
- Bonds have lower risk and interest; debentures offer higher risk and interest
- Debentures can be converted to equity; bonds usually cannot
- Both are part of non-current liabilities in company accounts
- Relevant for class 12 commerce exams, CA/CS, UPSC, and business awareness
Further Learning at Vedantu
To deepen your understanding, explore related topics: Difference Between Shares, Bonds and Debentures, Issue of Debentures, and Redemption of Debentures. At Vedantu, we simplify commerce topics with clear examples, classification tables, and focused exam tips.
In summary, understanding the difference between bonds and debentures helps students and investors choose the right instruments for their needs. Both are valuable sources of funds for companies, but they carry different risks and features. Mastery of this concept is useful for academic success and informed financial decisions.
FAQs on Bonds vs Debentures: Key Differences, Features & Examples
1. What is the main difference between bonds and debentures?
Bonds and debentures are both fixed-income securities representing debt, but they differ primarily in their security and issuer. Bonds are typically issued by governments or large corporations and are often secured by collateral, while debentures are usually issued by companies and are generally unsecured.
2. Are all bonds considered debentures?
No, not all bonds are debentures. While both are debt instruments, bonds are broader and often secured, whereas debentures are a specific type of unsecured debt instrument typically issued by corporations. Think of debentures as a subset of bonds.
3. How are bond holders and debenture holders different?
The main difference lies in the security of their investment. Bondholders have a higher degree of security as their investment is often backed by collateral. Debenture holders, on the other hand, are unsecured creditors and have a higher risk of loss in case of company insolvency. Both are creditors, but their claim hierarchy differs.
4. What is the difference between a bond and a debt?
A bond is a type of debt. Debt is a general term for borrowed money, while a bond is a specific type of debt instrument that represents a loan made to a borrower (government or corporation) and promises to repay a fixed sum of money (the principal) along with interest over a specified period. Debentures are a specific form of bond.
5. Can a debenture be converted into a share?
Yes, some debentures are convertible, meaning they can be exchanged for shares (equity) of the issuing company under specific conditions, often after a certain period. This offers the holder a chance to participate in the company's potential growth but carries additional risk.
6. Which is safer: bonds or debentures?
Generally, bonds are considered safer than debentures because they are often secured by assets. If the issuer defaults, bondholders have a claim on these assets. Debenture holders are unsecured creditors and rank lower in the repayment hierarchy, making them riskier.
7. What is the difference between bonds debentures and shares?
Bonds and debentures represent debt – a loan to the company. Shares represent equity – ownership in the company. Bondholders and debenture holders are creditors with a fixed claim, while shareholders are owners with potential for higher returns but also higher risk.
8. What is the difference between bonds debentures and equity?
Bonds and debentures are forms of debt financing, obligating the issuer to repay principal and interest. Equity represents ownership in a company; equity investors (shareholders) share in profits and losses but have no guaranteed return. They have different risk profiles and return expectations.
9. What is the difference between bonds and debentures in India?
In India, the key differences remain the same: bonds are often secured and issued by governments or large firms, while debentures are primarily issued by companies and are often unsecured. However, specific regulations under the Companies Act and SEBI norms govern their issuance, listing, and trading in Indian markets.
10. Difference between bonds and debentures class 12?
For Class 12, understanding the core difference in security is crucial. Bonds are generally secured, while debentures are usually unsecured. Knowing this distinction is key for answering short-answer and multiple-choice questions (MCQs) related to debt instruments in your exams.
11. Difference between bonds and debentures upsc?
For UPSC, a deeper understanding is needed, encompassing the legal aspects, role in financial markets, and implications for economic policy. Compare the features, risks, and regulatory frameworks for both instruments in the Indian context, referring to the Companies Act and SEBI regulations. Use examples of government and corporate bonds along with different debenture types.
