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What is the difference between a bond and a debenture in terms of the issuing entity and risk?

Curious about bonds and debentures

What is the difference between a bond and a debenture in terms of the issuing entity and risk?

In terms of the issuing entity and risk, the main difference between a bond and a debenture lies in their legal structure:

1. Bond:
A bond is a debt security issued by corporations, municipalities, or government entities to raise capital.
Bonds are typically secured by specific assets or collateral, which act as a form of security for bondholders. This means that if the issuer defaults on the bond payments, bondholders have a claim on the specified assets to recover their investment.
Secured bonds are generally considered to be less risky than debentures because of the added protection provided by the collateral.
Examples of secured bonds include mortgage bonds and assetbacked securities.

2. Debenture:
A debenture is also a debt security issued by corporations or government entities, but unlike bonds, debentures are not backed by any specific collateral.
Debentures are unsecured, meaning there is no specific asset pledged as security for the debenture holders. If the issuer defaults on the debenture payments, debenture holders become general creditors of the company or issuer.
Since debentures lack collateral, they are considered riskier than secured bonds.
However, to compensate for the higher risk, debentures often offer higher interest rates compared to secured bonds.

In summary, the key difference between bonds and debentures is the presence of collateral. Bonds are typically secured by specific assets, providing an added layer of protection for investors. Debentures, on the other hand, are unsecured and do not have specific collateral backing, which makes them riskier but potentially more rewarding in terms of yield. Investors should carefully assess their risk tolerance and investment objectives when considering investments in either bonds or debentures.

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