Difference Between Bonds and Debentures

Bonds

Bonds are the financial instrument that the company issue and sell to the capital market. The company issue bonds to raise money from the investors and promise to pay back both principal and interest. It means the company borrows money from investors and bonds are used as the contract to prove it.

The issuer will pay interest base on the rate known as bonds coupon. The value of each bond is known as par value which represents the amount that the issuer needs to pay back at the end of the maturity date. The amount of money that investors use to purchase the bonds may different from the par value. It depends if the bonds sell at a premium or discount.

Debentures

Debentures are the marketable security that the company issue into the market to raise cash in the form of debt. Similar to bonds, it means the issuer borrows money from investors and promise to pay them back at the end of the maturity date.

The company issues debenture with a specific purpose which is different from bonds. For example, the company has a budget the capital requirement for new products, but they do not have enough cash. So they decide to issue debenture to borrow cash to implement such a project.

Difference Between Bonds and Debentures

No	Bonds	Debenture
Colleterial	The company secures bonds with the collateral to gain trust from the investors.	There is no collateral to back up the debenture. They are issued base on the issuer’s credit rating.
Issuer	Bonds are issued by the corporate, government, and financial institutes.	Debentures are mostly issued by private companies to raise funds for a specific project.
Security	Bonds are a secure financial instrument if we compare to debenture.	A debenture is less secure than bonds.