Bonds and Debentures

Bonds and debentures are two types of fixed-income securities that are commonly traded in the Treasury market. While they share some similarities, there are also some key differences between them.

Bonds:

Bonds are debt securities issued by corporations, municipalities, and the U.S. government to raise capital. When an investor buys a bond, they are essentially lending money to the issuer in exchange for regular interest payments and the return of the principal when the bond matures. Bonds can have different maturities, ranging from a few months to several decades, and can have fixed or variable interest rates.

In the Treasury market, U.S. Treasury bonds are issued by the federal government to finance its operations. These bonds are considered one of the safest investments in the world because they are backed by the full faith and credit of the U.S. government. Treasury bonds are issued with maturities of 10, 20, and 30 years and pay a fixed interest rate.

Debentures:

Debentures are also debt securities issued by corporations and governments to raise capital. Like bonds, debentures pay regular interest to investors and return the principal when they mature. However, unlike bonds, debentures are not secured by collateral, which means that investors have no claim on specific assets if the issuer defaults on the debt.

In the Treasury market, there are no debentures issued by the U.S. government. However, corporations may issue debentures as a way to raise capital.

Differences between bonds and debentures: The key difference between bonds and debentures is that bonds are secured by collateral, while debentures are not. This means that if the issuer defaults on the debt, bondholders have a claim on specific assets, while debenture holders do not. Because of this, bonds are generally considered to be less risky than debentures, and they typically offer lower interest rates as a result.

Bonds are securities but are different from shares of stock in that stock is an ownership interest but bonds are purely “debt”. Therefore a shareholder is an owner, but a bond-holder is merely a creditor. Interest paid to bond-holders receives preferential tax treatment compared to dividends paid to shareholders. In bankruptcy, bond-holders are paid before short term creditors including workers and all creditors must be paid in full before owners receive anything.