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What’s the difference between bonds and debentures?

The term debenture applies to unsecured long-term loans where no assets or property are pledged as collateral for the loan. Debentures are very similar to bonds in that they are both common forms of debt instruments. Both bonds and debentures issue certificates evidencing debt on which the issuer promises to pay the holder a specified amount of interest based on the coupon rate, for a specified length of time and to repay the loan on its maturity. Bonds and debentures are also both issued by all levels of government, corporations, and some educational and religious organizations.

The two instruments differ in terms of how they are secured. A bond is secured by the specific assets of the issuer, while a debenture is secured only by the general credit of the issuer.

The advantage of debentures versus bonds to the issuer is that the cost of issuing debentures is less because there is no registration of assets. The disadvantage is that the coupon rate on a debenture may be higher than a comparable bond because of a lack of a pledge on specific assets.

The two debt instruments are often confused because of their similarities, and because of the fact that the word “bond” is sometimes used to refer to both bonds and debentures.