A debenture bond is a type of bond that is issued by a corporation. It is not secured by any asset or collateral but is backed up by the reputation and integrity of the corporation that issues the debentures. This type of bond often bears a higher rate of interest than secured debentures to compensate investors for the additional risk of not having to repay their funds. Although debentures are a type of bond, not all bonds are debentures. We will look at the difference between bonds and debentures in this article as well as other types of debentures and bonds.<\/p>\n\n\n\n
They are similar to loan certificates. Debentures are issued to the public as a repayment contract for money borrowed from them. These debentures have a defined maturity date and a fixed interest rate that might be paid yearly or semi-annually. Debentures, like equity shares, are also available to the general public.<\/p>\n\n\n\n
Treasury bonds and Treasury bills are examples of debentures.<\/p>\n\n\n\n
A debenture bond is a bond that is issued by a corporation and has no collateral security. Debenture bonds are a funding source that appears on the balance sheet as corporate obligations. Whenever a bond is insecure, you can say that it is a debenture bond but when the bond is secured it is called a secured bond. <\/p>\n\n\n\n
A Bond and a debenture are both debt instruments that are issued by the government or a corporation. These are both fundraising instruments for the corporation. People interchangeably use these two words but in reality, they are not the same. Government, government agencies, or a major corporation issues a bond, while a debenture is issued by public firms to raise capital from the market. Bonds are the financial instruments government agencies and private organizations ensure, to raise additional funds from the public. While the private\/public companies issue debentures for raising capital from the investors. Below are other differences between a bond and a debenture<\/p>\n\n\n\n
Debentures are unsecured debt instruments, unlike bonds, which are backed by the issuer’s asset. Only the creditworthiness and reputation of the issuing party matters when it comes to buying or selling debentures. Bonds often have a lower interest rate than debentures.<\/p>\n\n\n\n
The following are the prominent types of debentures; <\/p>\n\n\n\n
They are bonds that can convert into equity shares after a certain length of time. Convertible debentures are financial securities that combine the advantages of debt and equity. They are fixed-rate loans with fixed interest payments that many corporations employ. However, debenture holders have the choice of either keeping the debt until maturity and receiving interest payment or converting the loan into equity shares.<\/p>\n\n\n\n
Convertible debentures are appealing to investors who want to convert to equity because they anticipate the company’s stock will rise over time. However, the ability to convert to equity comes with a cost because convertible debentures pay a lower interest rate than other fixed-rate investments.<\/p>\n\n\n\n
Nonconvertible debentures are debentures that are not convertible into equity in the issuing corporation. Investors can receive a higher interest rate to compensate for the absence of convertibility when compared to convertible debentures. They may also prefer the convertibility characteristic of debenture bonds. As a result, convertible securities will have lower interest rates than their non-convertible counterparts.<\/p>\n\n\n\n
Debentures are more risky because they are not often backed by collateral. Instead, they are backed only by the issuing party’s faith and credit<\/p>\n\n\n\n
The interest on debentures is deducted from the company’s profit.<\/p>\n\n\n\n
Debentures are good for businesses because, compared to other types of loans and debt instruments, they have lower interest rates and longer payment terms.<\/p>\n\n\n\n
Secured debentures are debentures that are secured by a charge on the issuer’s fixed assets. For instance, mortgage debentures get their protection from the company’s land. Secured debentures bear less risk than unsecured debentures. The secured debenture’s agreement defines the terms and conditions of a loan thus stating the amount, interest rate, repayment period, and secured assets. For instance, a floating charge is when the debenture-holders have a charge on the entire property of a company.<\/p>\n\n\n\n
Both present and future, and when it can deal with the property in the ordinary course of business until the charge crystallizes, i.e., when the company goes into liquidation or when there is a new receiver. A city, for example, might use future property tax receipts to secure a bond, whereas companies might use their factories as bond securities. A fixed charge asset in a secured debenture is generally an industrial or office building.<\/p>\n\n\n\n
Secured debentures go with a fixed or floating charge. When the floating charge crystallizes, the debenture holders have a right to payment out of the sale profits of the assets, subject to the preferential creditor’s claim, but before any payment to unsecured creditors. This may cause a reduction in the coupon rates and cheaper borrowing costs for issuers. It is a bond that has its protection by a pledge of assets.<\/p>\n\n\n\n
There are three major types of bonds<\/p>\n\n\n\n
Globally, governments sell bonds and securities to produce money, fund government expenditure, and services and pay off debt. US government and agency bonds and securities have the US government’s “full faith and credit” guarantee which is one of the safest investments. That is, regardless of war, inflation, or the status of the economy the United States government repays its bondholders.<\/p>\n\n\n\n
Treasury bonds, bills, and notes issued by the United States government are the highest-quality securities available. They are issued by the Bureau of Public Debt of the United States Department of Treasury. Treasury securities are all convertible and you can exchange them on the secondary market. Furthermore, you can differentiate them by maturity dates ranging from 30 days to 30 years. <\/p>\n\n\n\n
One significant advantage of Treasuries is that the interest they pay is tax-free at the state and municipal levels. The United States issues Treasury bills, treasury notes, and treasury bonds. Let’s look at them briefly<\/p>\n\n\n\n
Treasury bills pay no interest and have maturities ranging from a few days to 52 weeks. T-bills are short-term securities with maturities of less than a year. Because they sell it at a discount from their face value, they do not pay interest until maturity.<\/p>\n\n\n\n
These are fixed-income securities with maturities ranging from 2 – 3 years through 5, 7, and 10 years. Treasury notes (T-notes) have maturities ranging from one to 10 years and earn a fixed rate of interest every six months. The 10-year Treasury note is the benchmark for the mortgage market. They use it to analyze the performance of the United States government bond market.<\/p>\n\n\n\n
Treasury bonds have maturities ranging from 10 to 30 years. They feature a coupon payment every six months like the like T-notes,<\/p>\n\n\n\n
In addition to these Treasury securities, certain government entities also issue bonds. As we said earlier, bonds come from the Government National Mortgage Association (Ginnie Mae), the Federal National Mortgage Association (Fannie Mae), and the Federal House Loan Mortgage Corp. (Freddie Mac) for specific reasons.<\/p>\n\n\n\n
The state and local governments issue municipal bonds (“munis”) to fund the building of schools, roadways, housing, sewer systems, and other significant public infrastructure projects. For investors who live in the jurisdiction where the local government issues the bond, these bonds are typically exempt from federal income tax and, in some situations, state and municipal taxes.<\/p>\n\n\n\n
Munis typically offer competitive rates, but this is not safe because local governments can go bankrupt.<\/p>\n\n\n\n
It’s worth noting that in some states, investors must pay state income tax; if they buy shares in a municipal bond fund that invests in bonds issued by states other than the one where they pay taxes. However, some municipal bonds in the fund may not be subject to ordinary income tax. They may be liable to federal, state, and local alternative minimum tax. Finally, if an investor sells a tax-exempt bond fund at a profit, he will need to consider the capital gains taxes<\/p>\n\n\n\n
Municipal bonds are classified into two types. General obligation bonds and revenue bonds. The issuer’s full faith and credit secure general obligation bonds and back them up with the issuer’s taxing power.<\/p>\n\n\n\n
Corporations issue bonds to fund a substantial capital investment or a business development. Corporate bonds have a higher amount of risk than government bonds, but they typically have larger prospective yields. The value and risk that goes with corporate bonds heavily influence the company issuing the bond’s financial outlook and reputation.<\/p>\n\n\n\n