Bonds and Debentures

Bonds

Bond is an instrument of indebtedness of the bond issuer to the holders. It is a debt security, under which the issuer owes the holder a debt and depending on the terms of the bond is obliged to pay them interest and/or to repay the principal at a later date, termed the maturity.

Interest is usually payable at fixed intervals, thus a bond is a form of loan, the holder of the bond is the lender (Creditor) the issuer of the bond is the borrower (debtor) and the coupon is the interest.

Types of Bonds

  • Fixed-rate bonds: Interest remains constant
  • Floating-rate bond: Has variable interest rates
  • Zero-coupon bonds: They do not bear interest
  • Inflation Indexed bonds: They are indexed to Inflation
  • Securitized bond: They are backed by an underlying cash flow from another asset
  • Sovereign bonds: They are issued by National Government
  • Corporate bonds: Bonds issued by companies
  • Gilts: Bonds issued by the Government of UK

Debentures

A debenture is a document that either creates a debt or acknowledges it, and it is a debt without collateral. In corporate finance, the term is used for a medium- to long-term debt instrument used by large companies to borrow money. In some countries the term is used interchangeably with bond, loan stock or note. A debenture is thus like a certificate of loan or a loan bond evidencing the fact that the company is liable to pay a specified amount with interest and although the money raised by the debentures becomes a part of the company’s capital structure, it does not become share capital.

Type of Debentures

  • Registered debentures
  • Bearer debentures
  • Secured debentures
  • Unsecured debentures
  • Redeemable debentures
  • Perpetual debentures
  • Convertible debentures
  • Non-Convertible debentures

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