Difference between Debentures & Bonds

Debentures

World over, a debenture is a debt security issued by a corporation that is not secured by specific assets, but rather by the general credit of the corporation. Stated assets secure a corporate bond, unlike a debenture. But in India these are used interchangeably.

Bonds

A bond is a promise in which the issuer agrees to pay a certain rate of interest, usually as a percentage of the bond's face value to the investor at specific periodicity over the life of the bond. Sometimes interest is also paid in the form of issuing the instrument at a discount to face value and subsequently redeeming it at par. Some bonds do not pay a fixed rate of interest but pay interest that is a mark-up on some benchmark rate .

Typically bonds are issued by PSUs, Public Financial Institutions and Corporates. Another distinction is SLR (Statutory Liquidity Ratio) and non-SLR bonds. SLR bonds are those bonds which are approved securities by RBI which fall under the SLR limits of banks.

Statutory Liquidity Ratio (SLR): It is the percentage of total deposits a bank has to keep in approved securities.

What effects Bond Prices

Largely it will be the interest rates and credit quality of the issuer.

Interest Rates: The price of a debenture is inversely proportional to changes in interest rates that in turn are dependent on various factors. When the interest rates fall down, the existing bonds will become more valuable and the prices will move up until the yields become the same as the new bonds issued during the lower interest rate scenario (for a detailed explanation see "what affects interest rates").

Credit Quality: When the credit quality of the issuer deteriorates, market expects higher interest from the company and the price of the bond falls and vice versa.

Another factor that determines the sensitivity of a bond is the "Maturity Period" - a longer maturity instrument will rise or fall more than a shorter maturity instrument.

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