Bonds
Bonds are financial instruments used by both public and private sector entities to secure funding for their operations. These instruments are issued to investors by government agencies, financial institutions, and private enterprises. Bonds are backed by tangible assets, providing a level of security to investors. In this arrangement, the bondholder assumes the role of the lender, while the issuer takes on the role of the borrower. The borrower commits to repay the principal loan amount along with a fixed interest rate at a predetermined maturity date. Generally, the interest rate on bonds tends to be lower than that on debentures, as bonds are supported by the company's physical assets, while debentures are unsecured financial instruments.
Debentures
Debentures, akin to bonds, serve as debt financial instruments that organizations utilize to secure funds for their operational requirements. Unlike bonds, these instruments lack collateral in the form of tangible assets from the issuing entity, rendering them relatively riskier. Debentures may feature either a fixed or variable interest rate. Notably, debenture holders enjoy a priority status over shareholders regarding the disbursement of interest and dividends. Owing to the absence of physical asset backing, debentures usually offer higher interest rates in comparison to bonds.