Difference betwen debentures and bonds
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Answer Posted / nishi rani
Bonds and Debentures
Debt instruments can be further classified into the
following categories based on the different characteristics
with which they are floated in the market:
# Debentures
# Bonds
Debentures
Main characteristics
* They are fixed interest debt instruments with varying
period of maturity.
* Can either be placed privately or offered for
subscription.
* May or may not be listed on the stock exchange.
* If listed on the stock exchanges, they should be rated
prior to the listing by any of the credit rating agencies
designated by SEBI.
* When offered for subscription a debenture redemption
reserve has to be maintained.
* The period of maturity normally varies from 3 to 10
years and may also be more for projects with a high
gestation period.
Bonds may be of many types - they may be regular income,
infrastructure, tax saving or deep discount bonds. These
are financial instruments with a fixed coupon rate and a
definite period after which these are redeemed. The
fundamental difference between debentures and bonds is that
the former is normally secured whereas the latter is not.
Hence in general bonds are issued at a higher interest rate
than debentures. This avenue of financing is mainly availed
by highly reputed corporate concerns and financial institutions.
The three main kinds of instruments in this category are as
follows:
# Fixed rate
# Floating rate
# Discount bonds
* The bonds may also be regular income with the coupons
being paid at fixed intervals or cumulative in which the
interest is paid on redemption.
* Unlike debentures, bonds can be floated with a fixed
interest or floating interest rate. They can also be floated
without interest and are called discount bonds as they are
issued at a discount to the face value and an investor is
paid the face value on redemption.and if offered for longer
terms are known as deep discount bonds.
* The main advantage with interest bearing bonds is the
floating interest rate, which is stipulated based on certain
mark-up over stock market index or some such index.
* From the point of view of the investor bonds are
instruments carrying higher risk and higher returns as
compared to debentures.
* This has to be kept in mind while floating bond issues
for financing purposes. With the current buoyancy in capital
markets for equity instruments the demand for corporate
bonds is low.
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