Difference Between Bonds and Debentures
Difference between a Bond and a Debenture lies in security, risk, and tenure. Bonds are secured, long-term, and safer, while debentures are unsecured, medium-term, and offer higher returns. Both help organizations raise capital and provide investors with earning opportunities.
Muskan Verma20 Nov, 2025
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Difference Between Bonds and Debentures: Companies and governments need money to run their operations and grow. They raise this money from people who are willing to lend. Two of the most common ways of borrowing are through bonds and debentures. Both are debt instruments, which means the investors give money to the company or government in exchange for a promise of repayment with interest.
Below, we’ve explained what bonds and debentures are, highlighted their features, and presented a clear comparison to help students understand them better.
What are Bonds?
Bonds are financial instruments that represent a loan given by an investor to a company, financial institution, or government agency. In return, the issuer agrees to pay interest at fixed intervals and repay the principal amount on a specific maturity date.
Key Features of Bonds:
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Secured by Assets: Most bonds are backed by collateral or physical assets, making them safer than other unsecured instruments.
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Long-Term Investment: Bonds usually have longer tenures, making them suitable for organizations that are raising capital for infrastructure, expansion, or development of projects.
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Fixed Returns: They usually provide a fixed or floating interest rate that is relatively stable.
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Lower Risk: Since bonds are secured, the risk for investors is lower.
What are Debentures?
Debentures are also debt instruments that companies use to raise funds. However, unlike bonds, debentures are usually not secured by any physical assets. Investors lend money to the company based mainly on its reputation and financial standing.
Key Features of Debentures:
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Unsecured Instruments: Debentures are not backed by collateral, making them riskier.
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Medium-Term Investment: Their tenure is usually shorter than bonds, often ranging from medium to long term.
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Higher Returns: Since they involve more risk, the interest rate on debentures is generally higher than bonds.
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Priority Over Shareholders: In case of financial distribution, debenture holders are paid before shareholders.
Difference Between Bonds and Debentures
Below, we’ve mentioned the difference between bonds and debentures:
| Difference Between Bonds and Debentures | ||
| Basis of Difference | Bonds | Debentures |
| Definition | Debt instruments issued by governments, financial institutions, or large corporations, secured by collateral or physical assets. | Debt instruments issued by companies, usually unsecured and not backed by collateral. |
| Owner | Holder is called a bondholder. | A holder is called a debenture holder. |
| Collateral | Secured by the company’s physical assets. | Not secured by physical assets, depends on the issuer’s reputation. |
| Tenure | Usually, long-term investments. | Generally short to medium-term investments. |
| Issuer | Large corporations, financial institutions, or government agencies. | Mainly private companies. |
| Rate of Interest | Fixed or floating, generally lower than debentures. | Fixed or floating, generally higher than bonds. |
| Priority During Liquidation | Bondholders are given first priority for repayment. | Debenture holders are paid after bondholders but before shareholders. |
| Payment Structure | Interest is paid regularly on an accrual basis, not linked to company performance. | Interest may depend on the company’s performance and is paid periodically. |
| Risk Factor | Less risky due to the security of assets. | Riskier due to lack of collateral. |
Which is safer Bonds or Debentures?
From a safety perspective, bonds are considered more reliable because they are backed by the issuing company’s assets. This security lowers the chances of default and ensures regular payment of interest.
Debentures, on the other hand, carry a higher degree of risk as they are unsecured. However, this risk is balanced by higher interest rates, which can be attractive to investors willing to take more risk for better returns.
Importance of Bonds and Debentures in Raising Capital
Both bonds and debentures play a crucial role in financing. Below, we’ve mentioned the importance of Bonds and Debentures in Raising Capital:
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For Companies and Governments: Bonds provide long-term funding for infrastructure, expansion, or development, while debentures help meet immediate financial needs.
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For Investors: Bonds appeal to risk-averse investors seeking stability, whereas debentures attract those open to higher risk for better returns.
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For the Economy: The issuance of bonds and debentures supports economic growth by channeling savings into productive investments.
The difference between bonds and debentures comes mainly in their security, risk, and tenure. Bonds are secured, long-term, and less risky, but debentures are unsecured, medium-term, and offer higher interest rates. Both are important instruments that help organizations raise capital and provide investors with opportunities to earn returns.