Bonds are debt financial instruments that both public and private sector companies use to raise funds for their operations. The government agencies, financial institutions as well as private enterprises issue these instruments to investors. Bonds are secured by their physical assets. The holder of these bonds is the lender, while the issuer of these bonds is the borrower. The borrower can issue these bonds to the lender, only by promising to pay back the loan at a specific maturity date with a fixed interest rate. This interest rate is generally lower than debentures because the physical assets of a company secure bonds whereas the debentures are unsecured instruments 

What is a Debenture 

Debentures are also debt financial instruments like bonds. Organisations use these instruments to get funding for their daily needs. They are generally not secured by any physical assets of the issuers, which makes them riskier than bonds. They also carry a fixed or floating interest rate. The debenture holders get first preference over shareholders of a company when it comes to the payment of interests/dividends. The interest rate on debentures is generally higher than bonds because they are not secured by the physical assets of a company 

Key Difference Based on the factors 

Following are some key differences between bonds and debentures based on the various factors: 

  A bond and a debenture are both structures of borrowed capital; however, the distinction comes from within the nature of each instrument. A bond is backed by collateral, whereas a debenture isn’t. However, the scope of earning is usually high with debentures. If you’ve got the flexibility to measure the trustworthiness of the issuer of the debentures, you’ll undoubtedly obtain debentures for a stronger profit. However, if you are new to the sector of an investment, then bonds are a stronger selection for you. 

In the end, the choice will depend on your risk tolerance and financial goals