Difference Between NCD, Bonds & Debentures

If you are looking for an investment that can give you consistent income, you must have heard of investments called bonds, debentures, and Non-Convertible Debentures (NCDs). While all these are similar in some ways, as they all belong to the debt instrument family. However, there are also certain differences among them. They have different issuing agencies, security, tenure, rate of interest, and level of risk associated with them.

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 generally considered to have low credit risk when issued by the sovereign.

Corporate bonds are issued by companies and may carry higher credit risk than government bonds, depending on the issuer. But corporate bonds are often found to offer better returns than government bonds. The returns on corporate bonds, however, depend on factors such as credit quality, tenure, and market conditions. Bonds usually have longer tenures ranging from 5 to 30 years. Though you cannot prematurely close the bond, you can sell it on the stock exchange before maturity if it is listed and there is sufficient market liquidity.

What Are Debentures?

Debentures are debt instruments issued exclusively by companies to raise capital for business expansion, working capital needs, or other corporate purposes. They can be secured or unsecured. Investors may consider factors such as the company's financial position, credit rating and the terms of the issue when evaluating a debenture.

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 from 1 to 10 years. NCDs offer fixed interest rates and provide regular income to investors through periodic interest payments.

NCDs come with credit ratings that help assess the issuing company's creditworthiness and the credit risk associated with the instrument. They can be secured or unsecured. Most retail NCDs are secured against the company's assets, thereby providing additional safety to investors. A secured NCD may be backed by specific assets of the issuer, subject to the terms of the issue.

Difference Between Bonds, Debentures, and NCDs

FAQs

Are bonds and debentures the same?

No. Both are debt instruments, but they can differ in terms of the issuer, security, legal structure, and other terms. Bonds can be issued by governments and companies, whereas debentures are generally company-issued debt instruments.

Are NCDs and debentures the same?

NCDs are a type of debenture. The main difference is that NCDs cannot be converted into equity shares, while some debentures may have a convertible feature.

Are NCDs safe investments?

NCDs carry credit risk because they are issued by companies. Their risk depends on factors such as the issuer's financial position, credit rating, and whether the NCD is secured or unsecured. A higher interest rate can also come with higher risk.

Can I sell a bond or NCD before maturity?

If the security is listed and there is a functioning secondary market, you may be able to sell it before maturity. However, liquidity is not guaranteed, and you may have to sell at a price different from your purchase price.

Which usually offers higher interest: bonds or NCDs?

There is no fixed rule. Interest rates depend on factors such as the issuer, credit quality, tenure, market conditions, and issue structure. Corporate NCDs may offer higher rates than some lower-risk government securities because they can carry greater credit risk.

What does the credit rating of an NCD mean?

A credit rating reflects a rating agency's assessment of the issuer's ability to meet its debt obligations. It can be useful when comparing investments, but it should not be treated as a guarantee of repayment.