There are various fixed interest yielding instruments and two of these are a debenture and a bond. Let us first understand the similarity between the same, before understanding the difference.
Similarity between a bond and a debenture
Both a bond and a debenture are fixed interest yielding instruments. They give interest rates after a periodic period, which is clearly specified at the time of the issue of these bonds and debentures.
Difference between a bond and a debenture
Generally there are many types of bonds, while the types of debentures are pretty restricted. There are just two types of debentures in India. One is the non convertible debentures and the other is the fully convertible debentures. There was a third type, which was partially converted, which nobody issues these days.
In the non convertible debentures, the debentures are not converted into shares. What this means is that you get an interest till the company buys back or redeems the debentures.
In the partially converted debentures, a part of the debentures would be converted into shares, while the remaining portion would continue to attract interest rate.
In the fully converted debentures, the entire debentures can be converted into shares.
One of the major differences between a bond and the debenture is that the bonds can never be converted into shares. They tend to bear a fixed interest till the date of maturity. Bond like debentures may or may not be traded on the exchanges.
There are various bonds that we see issued from time to time in India. These could be tax free bonds, bonds issued by corporates and abroad we have muncipal bonds.
The ones issued by the government are generally safe. Another difference between a bond and a debenture is that a debenture is almost always issued by a corporation, while bonds can be issued by corporates and government alike.
Should you invest in bonds or debentures?
The choice is yours. Both generally tend to offer interest rates, unless the debentures are converted into shares. Look for returns which are higher and also look for the period of interest payment.
For example, if there is quarterly interest payment, your yields would tend to be higher. On the other hand, if there is annual interest rate payment, your yields would not be higher. There are also cumulative schemes under bonds and debentures, which will pay you your entire sum on maturity.