What is Bonds?
Bond is basically a financial instrument using which any company or government can generate capital by issuing the bonds. Bonds are basically in the form certificate which signifies the contract of indebtedness between the issuing company and the bondholders.
In general, bonds are secured form of collateral which enables the holder to sell or seize the debts if in case the company is unable to repay the amount invested by the holder within the stipulated time period.
All the bonds issued by the company are for a limited time period which has fixed rate of interest. The payment of interest should be made at regular intervals by the issuing company or it will add-on over time. The financial instruments like bonds are issued by the public sector, government organizations, large corporations, etc. The bonds issued by the government organizations are auctioned to members for bidding. The principal amount defined for the bonds should be paid by the mature date specified in the bond. Different types of bonds are as given below:
- Zero coupon bonds
- Double option bonds
- Option bonds
- Inflation bonds
- Floating rate bonds
- Euro bonds
- Foreign bonds
- Fully Hedged bonds
- Euro convertible zero bonds
Euro bonds with equity warrants.
Important Differentiating Points Between Bonds and Debentures
Below given differentiating points between Bonds and Debentures will give better clarity:
- Bonds are issued by government organizations or agencies to generate capital from the local public. Debentures are financial instruments which are issued by companies like public or private sector to generate capital.
- Bonds are secured collaterals which are backed by the assets. Depending on the type of Debentures, it can be secured or unsecured
- Both the financial instruments come with a fixed rate of interest, but the rate of interest on Debentures is higher than the Bonds.
- One who has invested in the bonds called the bondholder while the one who has invested in the debenture is called as the debenture holder.
- The disbursement of the debentures interest is done at periodic intervals regardless of whether the company has incurred profit or loss. In case of bonds, interest accrued has to be paid to the bondholders.
- Comparatively the factor of risk in bonds is much lesser than the debentures.
- The interest paid to Bondholders is on much more priority than the Debenture holders who receive at the time liquidation.
Both the financial instruments, Bonds, and Debentures, are borrowed capitals. The key difference between both the instruments is that the bonds are secured than the debentures. In order to issue the bonds or debentures, the creditworthiness of the issuing company is checked. As both the instruments are kind of liability for the company it is ensured to be repaid in an event of liquidating the company.