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Debentures and bonds are types of debt instruments that can be issued by a company. In some markets (India, for instance) the two terms are interchangeable, but in the United States they refer to two separate kinds of debt-based securities. The functional differences center around the use of collateral, and they are generally purchased under different circumstances.
Bonds are the most frequently referenced type of debt instrument, serving as an IOU between the issuer and the purchaser. An investor loans money to an institution, such as a government or business; the bond acts as a written promise to repay the loan on a specific maturity date. Normally, bonds also include periodic interest payments over the bond's duration, which means that the repayment of principle and interest occur separately. Bond purchases are generally considered safe, and highly rated corporate or government bonds come with little perceived default risk.
Debentures have a more specific purpose than bonds. Both can be used to raise capital, but debentures are typically issued to raise short-term capital for upcoming expenses or to pay for expansions. Sometimes called revenue bonds because they may be expected to be paid for out of the proceeds of a new business project, debentures are never asset-backed (they are not secured by any collateral) and are only backed by the credit of the issuer.
These debt instruments provide companies and governments with a way to finance beyond their normal cash flows. Some debentures and bonds are convertible, which means that they can be converted into company stock. In a sense, all debentures are bonds, but not all bonds are debentures. Whenever a bond is unsecured, it can be referred to as a debenture.