What are bonds and debentures?
Bonds
are debt securities issued by governments, municipalities, corporations, or
other entities to raise capital. When investors purchase a bond, they
essentially lend money to the issuer in exchange for periodic interest
payments, known as coupon payments, and the eventual repayment of the principal
amount at maturity. Bonds typically have a fixed interest rate and maturity
date, providing investors with a predictable income stream and a return on
their investment upon maturity.
Debentures
are a type of bond that is not secured by physical assets or collateral.
Instead, they are backed only by the creditworthiness and reputation of the
issuer. Debentures are typically unsecured, meaning that in the event of
default, debenture holders are considered general creditors and may not have a
claim to specific assets of the issuer. Debentures often offer higher interest
rates than secured bonds to compensate investors for the higher risk of
default.