What is the key difference between bonds and debentures?

The key distinction between bonds and debentures lies in their security status. Bonds are often secured by specific assets or collateral, which means that if the issuer defaults on the bond, bondholders have a claim on those assets to recover their investment. This security makes bonds generally considered lower risk compared to unsecured debentures.

Debentures, on the other hand, are not backed by any specific collateral. Instead, they are backed by the creditworthiness and reputation of the issuer. This lack of security means that debentures typically carry a higher risk when compared to secured bonds, which is why they may also offer higher interest rates to compensate investors for that additional risk. Understanding this distinction is crucial for investors when evaluating the risk and return associated with different types of debt securities.