Debenture vs. Bond: What's the Difference & Which Should You Choose?

Picture two businesses planning their next big move. One is looking to expand rapidly, taking calculated risks for potentially higher rewards. The other values stability, preferring predictable outcomes and steady growth. The first might turn to debentures for funding, while the second would likely issue bonds.

Both methods help businesses raise capital, but the choice depends on the company’s goals, financial health, and the investor’s appetite for risk and reward. Before you make your investment decision, it’s crucial to understand the key differences between bonds and debentures.

Understanding Bonds

A bond is a debt instrument where an investor loans money to an entity (corporate or government) for a defined period at a fixed or variable interest rate. 

Suppose a well-established corporation or a government agency needs to fund a major infrastructure project. Instead of taking a traditional loan, they issue bonds. When you invest in a bond, you’re essentially lending money to the issuer. In return, you receive a fixed interest, called a coupon, at regular intervals (for example, 8% or 14%* per year), and your principal is repaid at maturity.

Bonds are generally considered safer than other debt instruments, especially when issued by governments or highly rated corporations. In the event of liquidation, bondholders are prioritised over shareholders for repayment. For investors seeking to balance risk and reward, bonds can add stability and assured returns to a portfolio.

Understanding Debentures

A debenture is an unsecured debt instrument issued by a company, backed only by the issuer’s creditworthiness rather than collateral.

Now, consider a company planning a new product launch or business expansion. Instead of a traditional loan, it issues debentures to raise the required funds. Debentures are long-term debt instruments, often used for specific projects. The interest rate may be fixed or floating, and payments are made before any dividends go to shareholders.

At maturity, the principal is repaid either as a lump sum or in installments, sometimes through a debenture redemption reserve. Since debentures are not typically secured by assets, investors rely on the company’s financial strength. This is why debentures—especially non convertible debentures—usually offer higher interest rates to compensate for the increased risk.

Types of Bonds and Debentures

Before making an investment, it’s helpful to know the various types available:

Types of Bonds

• Government Bonds: Issued by governments to finance public projects; considered the safest option.

• Corporate Bonds: Issued by companies, available as investment-grade or high-yield.

• Zero Coupon Bonds: Sold at a discount, pay no regular interest, but return full face value at maturity.

• Convertible Bonds: Can be converted into company shares.

• Floating-Rate Bonds: Interest rates adjust based on market conditions.

• Fixed-Rate Bonds: Offer a fixed interest rate throughout the term.

Types of Debentures

• Convertible Debentures: Can be converted into equity shares.

• Non Convertible Debentures: Cannot be converted into shares; offer higher interest rates to attract investors.

• Registered Debentures: Ownership is recorded and transferable through clearing facilities.

• Unregistered (Bearer) Debentures: Transferable by delivery, with no ownership record.

• Redeemable Debentures: Can be redeemed on a specified date.

• Irredeemable Debentures: Only repaid if the issuer is liquidated.

Additional Read - 5 Types of Risks in Bond Investments

Key Differences Between Bonds and Debentures

Let’s break down the main distinctions between bonds and debentures:

How to Decide Between Bonds and Debentures?

Picking the right investment isn’t as complicated as it sounds. It all comes down to a few key things:

1. Risk Appetite

Are you okay with a little risk if it means possibly earning more? If yes, debentures—especially non convertible debentures (NCDs)—might catch your eye. But if you’re someone who likes to play it safe and prefers steady, reliable returns, government bonds could be your go-to.

2. Looking at Returns

Debentures usually offer higher returns, but that’s because they’re not backed by collateral. In short, they’re riskier. Bonds tend to offer lower but more stable returns, especially if they’re government-backed.

3. What’s Your Time Frame?

If you’re investing for the long haul, bonds are a great fit. But if your goals are short- to medium-term, debentures might be more in line with your plans.

4. Need Flexibility?

Think you might need your money before the investment matures? Bonds are typically easier to trade in the secondary market, so they offer better liquidity. Debentures, on the other hand, can be harder to sell early, so they’re not the best choice if flexibility is a priority.

If you're aiming for higher returns and are comfortable with more risk, debentures could be a good option. But if you value stability, easy access to funds, and a long-term outlook, bonds might be the right choice for you.

Making Your Investment: Bonds or Debentures?

Both bonds and debentures offer unique advantages. Bonds are a great option if you're looking for a steady income and lower risk. On the flip side, debentures—especially non convertible debentures—can offer higher returns if you're comfortable with a little more risk.

Ready to get started? Bondbazaar makes investing simple. With access to over 10,000 bonds, including government and corporate options, you can explore, compare, and trade in real-time, with no account opening or brokerage fees. Additionally, your investments are held securely in demat form, and interest is credited directly to your bank account.

So, whether you're all about safe returns or chasing higher yields, knowing the difference between bonds and debentures can help you make smarter, more confident investment choices that match your financial goals.

Additional Read - Why Bonds are the safest investment options right now