5 min read • Published 28 Feb 25
Difference Between Bonds and Debentures
Table of Contents
The main difference between a bond and a debenture is based on their risk levels. Bonds are backed by collateral security, while debentures are not secured unless for a specific type. Therefore, debentures may be more suitable for investors with high-risk tolerance levels. However, investment decisions can have a significant impact on the financial management journey. Investors should analyse both these instruments and explore what is the difference between bonds and debentures.
What is the Difference Between Bonds and Debentures?
The following points can differentiate between bonds and debentures:
| Points of difference | Bonds | Debentures |
| Meaning | These are debt instruments issued with a collateral backing. | These are loans like contracts or instruments, usually issued without collateral. |
| Returns | Investors earn semi-annual or annual returns. However, compared to debentures, their interest may be lower due to less risk. | Investors earn potential interest due to high risk on a quarterly, annually or semi-annually basis. |
| Pros | These are popular instruments, and investors can get better liquidity. Moreover, their characteristics and credit rating indicate their secure nature. | They are capable of getting converted into equities after specified years. Moreover, due to high risk, they can help earn potential interest income. |
| Cons | They do not allow equity conversion. Investors may also miss high returns due to the bond’s secured nature. | It can be highly risky and lack liquidity due to lesser popularity among retail investors. |
| Examples | In November 2025, the Reserve Bank of India announced the issue of Sovereign Green Bonds (SGrBs) worth ₹20,000 crores in 4 tranches. | On January 7, 2025, Edelweiss Financial Services issued non-convertible debentures worth ₹100 crores for public subscription. |
These debt assets may not be suitable for every investor. Therefore, considering certain factors is crucial for understanding its suitability.
What are Bonds?
Debt investments, secured by collateral and issued by different types of organisations, to raise funds are known as bonds. Investors earn interest income against the investment.
Investors get a wide range of options for investment in bonds, such as:
- Based on Issuer: Corporate, municipal, and government bonds
- Based on tenure: Perpetual bonds, short-term bonds, long-term bonds
- Based on Interest: Fixed interest bonds, floating interest bonds, zero-coupon bonds
- Based on purpose: Green bonds, inflation-indexed bonds, infrastructure bonds
In India, the bond investment market has been growing in recent years.
What are Debentures?
The debt instrument or loan-like contract issued to raise funds, without collateral-backing, is known as a debenture. However, investors can explore a wide range of types of debentures to select the most suitable investment:
- Based on conversion: Non-convertible and convertible debentures
- Based on security: Secures and naked (unsecured) debentures
- Based on permanence: Redeemable and non-redeemable debentures
- Based on negotiations: Registered and bearer debentures
- Based on priority: First mortgage and second mortgage debentures
Understanding what is the difference between bond and debenture can help investors select the most suitable debt instrument for diversifying their portfolio.
What are Debt Instruments?
The investment instruments that raise funds for the issuing entity with an obligation of repayment with interest are known as debt instruments. Unlike equities, these are secure as their repayment is mandatory for the issuing entity.
Investing in debt instruments can benefit investors in the following ways:
- They provide fixed income like interest and are easy to transfer.
- A wide range of debt assets can match a variety of investor’s interests.
- In modern times, debt investments are gaining popularity, which can provide potential investment opportunities.
Factors to Consider while Selecting Between Bond and Debenture
Investments are significant financial decisions that can impact the monetary flow for the present and future. Along with understanding the difference between bonds and debentures, investors can explore these factors:
- Determine the risk tolerance for the portfolio
- Assess the diversification scope and requirements.
- Evaluate the debenture and bond issues in the market for investment.
Conclusion
Debentures and bonds differ mainly based on their level of security. Usually, debentures are not backed by collateral (except secured debentures) and offer options to convert to equities. Bonds have better liquidity due to their popularity and security. Investors should determine what is the difference between bond and debenture, seek its suitability in their portfolio and assess the market conditions before investing. Log into PowerUp Money or download its financial planning app to stay updated about financial instruments and their investment options.
Q: Which is more risky, bonds and debentures?
Generally, debentures are loan-like contracts and are not backed by collateral like bonds. Therefore, debentures carry more risk than bonds. However, secured debentures can be an exception to this.
Q: What are bearer debentures?
The unregistered contract without any ownership record is known as a bearer debenture. It is highly risky in nature as the person getting this debenture can claim its ownership due to lack of any record.
Q: What is the formula for yield calculation for bonds?
The bond yield is calculated by the current coupon interest divided by the current market price. It is the annual return rate up to the maturity and is inversely proportional to the bond price movement.
Q: What are green bonds?
The bonds issued for specific purposes of environment protection, renewable energy, green infrastructure, climate change management projects, etc., are known as green bonds. It can be issued by companies and the government.
Q: Which is better, stocks or debt instruments?
The better option between shares and debt will depend on the investor’s risk appetite and investment objectives. If an investor has a high-risk tolerance, shares can generate potential market returns. However, bonds are more secure and may generate lower returns than shares.
