Bonds and debentures
Normal people think the fixed deposit is the safest method and it provides some percentage return. Because of this mentality, many people invest in fixed deposits over other investments. There are other investments that provide 8% to 14% interest return.
In this article, we are going understand another type of investment which is the safest form and which give a consistent return. Here we are going to learn more about bonds and debentures.
What are bonds and debentures?
Bonds and debentures are famous debt instruments. When a company needs more money for expansion they will raise this money from different sources. Some of them will collect money from the share market by issuing IPO.
Some companies will go for bank loans but it requires a lot of documentation process. Another source of raising money is issuing bonds and debentures.
What are bonds?
Bonds are financial debt instruments that companies use to raise capital from public investors. Private sector, public sector companies, and government agencies issue this debt instrument to raise capital. Bonds are secured by companies or government agencies’ physics assets.
Compare to the debentures interest rates are lower in bonds. From the buyer’s point of view, the companies or government agencies need money so the investors are giving money to them and they will get a return in the form of interest. It is safe and you will get a consistent return. If a company issuing 8% interest means you will get this 8% interest consistently.
What are debentures?
Debentures are also financial debt instruments that are used by companies. Debentures are not secured by any of the company’s physical assets. It is risker than bonds. It contains a high-interest rate. Debentures have more preference compared to shareholders.
Difference between bonds and debentures?
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Tenure
Bonds: Bonds are considered a long-term investment
Debentures: tenure of a debenture will be short term
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Collateral requirement
Bonds: bonds are secured by a company’s or government agencies’ physical assets
Debentures: debentures are usually not secured with any of the physical assets of a company
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Risk
Bond: Bonds will have less risk in nature
Debenture: Debenture will have high risk in nature
Bond: Bonds are generally issued by government agencies or financial institution
Debenture: debentures are generally issued by private companies
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Interest rate
Bond: Bonds have less interest rate compared to debentures since it is secured with physical assets
Debentures: debentures have more interest rate since it is not secured with any physical assets
Basic terms included in bonds and debentures
Coupon rate
It is the amount (Interest rate) offered to the bondholders. Usually, they will pay this amount quarterly or annually as which the company or government agencies mentioned in the initial stage.
Face value
It is also known as par value. A bond’s face value is determined by the company at the time of issue.
Market value
It is the current value of the bond which is traded in the market, it may fluctuate with the market conditions.
Frequency
When a company plan for issuing bonds and debentures it will announce how it will give the interest rate whether it’s monthly or quarterly or annually. This is called the frequency period.
Maturity period
The maturity date is the date on which the investor’s principal amount will pay back from the company or government agencies. This will happen when the bond ends
There are 3 types of maturity periods
Short term: In this, the bonds maturity date will fall between one to three years
Medium-term: In these bonds, the maturity period will fall over ten years
Long-term: In these bonds, the maturity period will fall into a longer period of time
Bond Rating
In the bond market, you can see many ratings for different companies’ bonds. They are mainly published by the credit rating agency which will rate the bonds. For Example, the AAA rating is the best bond to invest in. Rating is based on safety. With a higher rating, it will be safe
How can you invest in bonds and debentures?
Initially, you can buy bonds and debentures from the company or government or you need to visit the scheduled bank to purchase the bonds and debentures now you can buy bonds and debentures from many platforms