What is the difference between Debentures and Bonds?
To understand debentures, we must first have a basic knowledge of bonds. Bonds are debt securities, similar to loans whereby the issuer promises to pay the investor the face value upon maturity, plus regular payments (know as coupon payments ) which are calculated using the set interest rate (coupon rate). The term coupon is associates because in olden days, the bonds had coupons attached to them, which were given to the investor when interest payment was due. Interest is typically paid annually, semi annually or at maturity (in which case it is a zero-coupon bond- ZCP). These bonds are generally issued by government bodies, municipalities, PSUs, Financial Institutions etc. Debentures are similar to bonds, but are issued by public and private companies. For e.g. Mr. Srinath buys a 5 year, 10% bond of a PSU for Rs.1000/- today. He gets Rs.100/- (10%-the coupon rate) every year (for the next five years) and Rs.1000/- at maturity (5 years later).
