Bonds & Debentures - Explained - YouTube

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Namaskar, my name is Mukul and you are welcome to the Asset Yogi

Friends, if a company or an organization has the requirements of the fund

Then it has two main options to raise the funds.

We have talked about this in the previous videos

The first is equity financing and the second is debt financing

Equity financing is a risk capital in which the company dilute their shareholding

If the company has 100 shares, then it says to sell the 10% share out of them

And raise the money. We will bring the new shareholders of 10%

So in a way, they sold their part of 10% to the new shareholders

They can invest that money in the business. The second option is if the company

doesn't want to sell their share, it doesn't want to dilute its shareholding

Then it can raise the debt financing. The most simple example of

debt financing is when the company can take a loan from the bank.

The second good option is that the company can issue bonds or debentures.

In bonds and debentures, the loan is taken from the public like when we take it from the bank

So bonds and debentures are a type of loan in which the company has to give

fixed interest or fixed returns to the bondholders or debenture holders

But many people get confused that what is the difference between bonds and debentures

See, somewhat they are similar. They have some differences.

which we are going to see in this video. So keep watching this video.

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Firstly we will talk about the similarities of the bonds and debentures

Both of them are a method for long term financing for any company

Like when a company takes a loan from the bank then it has to give fixed interest

Similarly, if a company is taking from the public by issuing bonds or debentures

Then fixed interests are promised there.

There is a fixed period along with the fixed interest

The company says that we are issuing bonds for 5 years

Or we are issuing debentures for 7 years

The interest payment during these 5 years or 7 years

How is this done?

Generally, the company gives two options in this

Either the interest can be paid every year

Or the interest can be paid altogether on the maturity period

whether it is 5 years or 7 years

Both the options are available for bonds and debentures

So both of them have similarities till here

The major difference between both of them is the first difference i.e security

Bonds are always secured.

What is the meaning of secure?

The company puts collateral as a security

Like if I give you an example

A home loan can be a good comparison to this

If you take a home loan then the bank keeps your house as a mortgage

If you fail to pay your home loan

Then the bank can auction the asset and recover the money

Similarly, if the company fails to make payment of your bonds

Then the bondholders can be paid by auctioning the company's asset

But debenture can be both secured and unsecured.

What is the meaning of unsecured?

We will take its comparison with a personal loan

When you take a personal loan then there is no collateral

Because there is no collateral, that means the risk increases

If a debenture is unsecured then it means its risk has been increased

So when the risk increases then the company has to pay more interest

If the debentures are unsecured then the company will give more interest to you

Because the bonds have minimal risk, there is less interest

Now it comes to the time of liquidation

When the condition of any company is very bad

And it cannot make payments on time

Let's say it is facing many losses

And the situation of bankruptcy has come

So whose payment will be made first?

Bondholders are treated as a loan, like a secured loan

Their payment is always made first

They are at a priority

If the debenture holders are unsecured, then their priority comes after the bondholders

There is one more difference between both of them

It is convertibility

Debentures can be converted into shares

This means if there is a convertible debenture

Then the company can issue shares for that to all the debenture holders

On the other hand, bonds cannot be converted into shares

So these are the broad differences between the bonds and debentures

Now, what type of companies issue these?

Many companies issue bonds

Many types of organizations like financial institutions

Government organizations, private companies

But the debentures are generally issued by the private companies

I hope after watching this video you understood the difference between the bonds and debentures

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Till then keep learning, keep earning

And be happy as always