Debenture vs. Bond: What's the Difference?

Debentures are a form of unsecured debt instrument that can be issued by corporations and governments to raise capital. Here are key points to understand about debentures:

1. **Nature of Debentures**: Debentures are long-term debt instruments that do not have collateral backing. They rely on the issuer's creditworthiness and reputation for support.
2. **Issuance Purpose**: Companies and governments issue debentures to fund major projects and expansions over the long term. They can be a preferred option for entities that want to avoid diluting equity or tying up assets through traditional loans.
3. **Types of Debentures**:
- **Convertible Debentures**: These allow holders to convert into equity shares under certain conditions, offering potential capital appreciation.
- **Non-Convertible Debentures**: These remain fixed-income securities until maturity, providing regular interest payments.
- **Registered and Unregistered Debentures**: Registered debentures have a record of holders, while unregistered (bearer) debentures can be transferred more easily.
- **Reredeemable and Irredeemable Debentures**: Redeemable debentures have a maturity date, requiring repayment of principal at that time. Irredeemable debentures do not have a maturity date, remaining outstanding indefinitely.
4. **Interest and Redemption**: Debentures typically pay periodic interest (coupons) and can be redeemed at maturity. The issuer must repay the principal amount at the end of the debenture's term.
5. **Legal and Financial Structure**: Debentures are documented in an indenture, which outlines the terms, including interest calculation, payment schedule, and maturity date. They are recorded as debt on the issuer's balance sheet.
6. **Investment Considerations**: Debentures can offer higher interest rates than other bonds, making them attractive for income-focused investors. However, they carry higher risk due to the lack of collateral.
7. **Market Trading**: Some corporate debentures are traded on stock exchanges, offering liquidity to investors.

In summary, debentures are a sophisticated form of debt financing that can be a strategic tool for companies and governments seeking long-term capital. They offer flexibility and can provide higher returns than traditional bonds, but they also come with greater risk due to their unsecured nature.