Debentures & Bonds Demystified

Finance is the basic necessity of companies, firms, and governments. To raise funds, many companies and governments issue debt or equity instruments . When it comes to debt, it is mainly debentures and bonds.

 In India, these two debt instruments are considered the same by many and their names are used interchangeably. However, they aren’t the same.

 Debentures: They are debt instruments issued by large corporations or governments to raise long-term finances. They aren’t backed by physical assets or collateral. They are backed by the creditworthiness of the organization.

There are two types: 

Convertible – These are the most attractive ones as they can be converted into equity shares of the issuing organization after a certain period of time. A point to remember is that the rate of interest is low.

Non-Convertible – As the name suggests, these cannot be converted into equity shares of the issuing organization. However, they can be converted into regular convertible ones and to compensate, the issuer offers a higher rate of interest.

Debentures often give a lower rate of interest when compared to bonds and are also considered second in the priority line in repayment at the time for liquidation.

Bonds: It’s a debt instrument where the investor loans money to an entity for a specified period of time with the assurance of repayment of the principal at the maturity date with regular (annual or semi –annual) payment of interest.

In India, they are issued by financial institutions, corporations, and government undertakings. The main purpose of issuing them is to raise long-term finance to meet capital expenditure needs. In the case of government undertakings, they are raised to not only meet future expenditure needs but current expenditure needs too.

Types: 

Corporate - They are issued by corporations and offer a higher rate of interest than the ones issued by public undertakings. They are safer compared to equities, however, it’s necessary to research the issuer’s credit history before investing.

Government - As the name suggests, they are issued by the government. These are low-risk or safe because there is a rare chance that the government might default on its payments. They are also known as G-Sec.

Deep Discount - These are sold at a rate lower than its face value and there is no interest payment, the interest amount is calculated and factored in the maturity value.

Convertible – The holder has the option of converting them into equity shares of the issuing entity after a certain period of time. They may be fully or partially convertible.

Where to invest in debt instruments?

Many broking houses offer such services. Leading broking houses like Reliance Securities not only offer access to such instruments, they make your job easier with secure trading platforms which are cost effective and many options to trade offline such as phone, chat, visiting the branch, and a network of affiliates.