Difference Between NCD, Bonds & Debentures

What Are Bonds?

Bonds are debt instruments issued by governments, government entities, or large corporations to raise funds from investors. When you buy a bond, you lend money to the issuer for a specified period. In return, you receive regular interest payments called coupon payments and get your principal amount back at maturity. Government bonds, such as treasury bonds or gilt securities, are considered the safest investments as they carry a sovereign guarantee. Corporate bonds are issued by companies and carry slightly higher risk due to the possibility of default. But corporate bonds offer better returns than government bonds. Bonds usually have longer tenures ranging from 5 to 30 years. Though you cannot prematurely close the bond, you can trade it on the stock exchange.

What Are Debentures?

Debentures are debt instruments issued exclusively by companies to raise capital for business expansion, working capital needs or other corporate purposes. By design, they are unsecured loans that investors provide to companies. Investors buy debentures solely based on the company’s reputation. Debentures can be convertible or non-convertible. Convertible debentures can be converted into equity shares of the company after a specified period, thereby giving investors a share of ownership in the company. On the other hand, non-convertible debentures (NCDs) cannot be converted into shares and remain pure debt instruments throughout their tenure.

What Are NCDs?

Non-Convertible Debentures (NCDs) are a specific type of debenture that cannot be converted into equity shares under any circumstances. They are issued by companies for a fixed tenure, ranging around 1-10 years. NCDs offer fixed interest rates and provide regular income to investors through periodic interest payments. NCDs come with credit ratings from which the issuing company's ability to repay can be gauged. They can be secured or unsecured. Though most retail NCDs are secured against the company's assets, thereby providing additional safety to investors.