Difference between Bond and Debenture, How companies raise Funds? What is better?

Understanding the Difference Between Bonds and Debentures

Bonds and debentures both are the debt instruments issued by the government, financial sector& public limited company.

As you are aware that finance and money are the backbone of any type of business. For expantion of business, funds are necessary and first need.

Funds can be raised through the debt instruments or by issuing the share capital of company to the investor or general public.

The businessman has the fear of lower stack in case of share capital if issued, so the businessman took funs by raising funds through debts and being free from les stack in comapny and paid some amount as interst on debt capital. and whenever the term of debt ends, he paid of as full and being free from making compliance or taking the process of redemption of share capital which is very lenthy process.

There is very minor differenece between the bond and debentures.

Defination of Bonds

Bonds are in secured in nature and issued in long run of time. Generally, they are secured by the underlying assets and rated by the Rating Agencies, which assured us for the safety of funds invested by us.

In general terms, it is an MOU between the issuer and an investor, that the investor will invest some amount in issuer organisation for a specific period of time for which the issuer pay him some amount as interst on periodically basis secured by the underlying assets of issuer.

In the Investment oppotunity, these has been treated as much safer then others. Bonds are generally issued by the government in India. Gold Bonds are the example of the same which are secured by the gold having security over the gold in the custy of custodian.

Bonds are not in speculative in nature.

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Defination of Debentures;

Debetures are the debt instrument which may or may not be secured in nature issued by the organisations. Debetures are defined in Companies Act, 2013 as a debt instrument issued by the company.

These may or may not be in redeemable in nature as the comapny has option to convert the same into equity in case of failure of repayment. So, it consists higher risk then the bonds.

Debetures is issued by the company in case of cash crunch of the company or to meet working capital requirement for starting a project. for example, in recent the Larsen & Tubro has issued carious type of debetures for a term of ten years for meet out ccapitla erquirement for startting its time-bound projects.

There are several type of debetures which may be difuracate as follows;

1 Unsecured Non Covertible debetures

2 unsecured convertible debetures

3 unsecured debentures with the option of conversion into equity or preference shares of company

4 Ir-reedemable debetures (These are not issued in India. As not allowed under the law.)

5 Secured convertible debetures

6 Secured debetures to be repaid on maturity of its term

7 Secured debetures with the option of conversion into equity on or before maturity

DIFFRENCE BETWEEN THE BONDS AND DEBENTURES

Base of comparasion	BONDS	DEBENTURES
Nature	They are secured in nature	they may or may not be secured in nature
Security	It has having high rate of security as paid first over the debetures in case of liquidation	It has having lower the security
Term	These are long term in nature	Generally the term of debetures are short. As teh comapnies act, 2013 allows for a term of 10 years in case of secured debentures
Calculation	Bonds = Assets – (liabilities+ Share holder’s reserve+ Debentures)	Debentures = Assets – (Liabilities+ Shareholder’s reserve+ Bonds)
Risk	Low	High
Rate of interst	Low	High
Option of conversion	Not allowed	Allowed depends upon the agreement between the parties
Issuing entities	Government Agencies, financial institutions, corporations, etc.	Limited Companies registered under the Companies Act, 2013

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CRUX

A bond and a debenture both are forms of borrowed capital but the difference comes in the nature of both the instruments. A bond is backed by collateral while a debenture is not. But the scope of earning is always high with debentures. If you have the ability to gauge the creditworthiness of the provider of the debentures, you can definitely buy debentures for a better profit. But if you are new to the field of investment then bonds are a better choice for you. Bonds are relatively more secured as they are issued by Government agencies hence the returns are granted here. But if your risk appetite is high and wants to earn a better profit in less time, debentures will work better for you.