Differences between NCDs and Bonds

12 Nov 2021|

1 min read |

by ICICI Securities Team

Introduction

For corporate firms, borrowing is a standard route for accessing funds. Bonds and Non-Convertible Debentures are two different borrowing routes to raise funds. Bonds are usually issued by the government and large corporations, while large public companies issue debentures to raise money from the market.

Understand the difference between NCD and Bonds

Investment type

A bond is a secured investment as collateral. An asset gets pledged here. So, if the issuer fails to repay the amount, the Bond owners can sell the asset and get their funds back. On the other hand, NCDs are usually unsecured. Any assets do not back them, so choosing a credible organisation when investing in debentures is essential.

Interest rate

The interest rates on bonds are lower than debentures. The low interest shows the low-risk factor while there are high interests in Non-Convertible Debentures, but it is risky. The interest on the Bond gets distributed monthly, half-yearly, or annually, and the interest amount is fixed or floating. The payment has no relation to the market performance of the issuer. But if you buy debentures, the interest rate may be high, and it gets paid depending on the issuer's performance.

Additional Read:Comparing NCDs/Bonds and Debt Mutual Funds

Possibility of conversion

When you own Bonds, there are chances of converting them to stocks if you have Convertible Bonds. But with Non-Convertible Debentures, it is impossible to convert them into the stock of the company.

Tenure

Bonds are generally long-term investments compared to NCDs. But the tenure varies based on the issuing company.

Risk

Bonds are secured by an asset and are less risky compared to Debentures. Since Debentures are not backed by collateral, the risk is high.

Issuing body

Debentures are issued by private companies, while the government and financial organisations usually offer bonds.Bonds and Debentures are both borrowing forms, but the difference lies in the instruments. A Bond is highly secure and is ideal for those who want a regular income source through interest.If you have the skills to gauge the creditworthiness of the Debenture issuer, you can buy them for better profit. However, if you are new to the investment sector, then Bonds are better than Debentures. They are secure as the government issues them, and the returns are guaranteed.

Additional Read:How Interest Rates affect Bond Prices

If you have a higher risk appetite and want to generate a better profit in the long term, you may want to consider Debentures. Compare both and keep your risk profile and investment goals in mind before making the decision.

Disclaimer

ICICI Securities Limited has its registered office at ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400025, India, Tel No:- 022 - 2288 2460, 022 - 2288 2470. The non-broking products / services like iLearn and Financial Learning are not exchange traded products / services and ICICI Securities Ltd. is just acting as a distributor/ referral Agent of such products / services and all disputes with respect to the distribution activity would not have access to Exchange investor redressal or Arbitration mechanism. iLearn is not an exchange traded product/service of ICICI Securities Ltd. All disputes with respect to the activity on the platform would not have access to Exchange investor redressal or Arbitration mechanism.

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