What is the difference between a bond and a debenture?


Quick Answer

A bond is a debt security that an entity secures from an investor at a fixed interest rate, while a debenture is a debt security that is obtained by a creditworthy reputation rather than through a specific asset. Thus, the main difference between a debenture and a bond is that a debenture has no collateral.

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Full Answer

While both bonds and debentures are methods for borrowers to acquire capital, there are subtle differences between the two debt security instruments. Bonds are more secure than debentures and offer lower interest rates than a debenture because it is an unsecured loan. Debentures are riskier for investors, but generate a higher return due to the higher interest rate.

Debentures often are secured by corporations and government agencies to obtain capital. Investors purchase debentures on the faith that the investor will not default on the repayment of the investment. An example of a debenture is a Treasury bond (T-bond). Debentures are documented in indentures like other bonds.

On the other hand, a bond is a debt investment made by bond buyers who loan money to a corporation or entity for a set time and with a fixed interest rate. Bonds are used to finance projects and activities. The length of time of the bond and the creditworthiness of the borrower determines the interest rate.

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