The most typical technique to obtain the needed finances is by borrowing. There are several methods for businesses to borrow money, with bonds and debentures being the most popular options. Non-convertible debentures and bonds are both types of fixed income securities, and many times both words are used interchangeably though they are both distinct Fixed Income Investment Options.
Non-convertible debentures (NCDs) and bonds are fixed-income securities that are issued by companies to raise capital from investors for various requirements, including the expansion or growth of an entity. While both these instruments carry a fixed rate of interest, they differ in terms of the duration of their issue, the issuer’s ability to redeem them, and the risk associated with them. NCDs also tend to be more volatile in nature and involve higher risks as compared to bonds. A bond may be referred to as a non-convertible debenture if it is not secured. In this article, we will be understanding fixed-income instruments like bonds and non-convertible debentures and discussing their advantages and disadvantages.
Bonds:
The most popular type of debt instrument is a bond. They are often issued by private businesses, governments, and other financial entities. They are loans for the issuing entity using pledged assets as security. Bond-issuing organizations take on the role of borrowers by promising to repay the principal and interest at the designated maturity date to the investors or lenders of the funds. Bonds are fixed-income securities wherein the issuer pays a fixed and periodic interest to the investors and on maturity, the principal amount is repaid. At the time of the issue of bonds, the issuer states the terms of the bond. This includes the coupon rate (interest rate on the bond), the face value of the bond, the duration for which the bonds are issued generally known as the maturity date, and various terms and conditions attached to the issue.
Bonds are a type of financial instrument that entities can use to raise more funds from the public for various expansions, working capital requirements, and repayment of existing debts, etc. Private and public enterprises both issue these fixed interest bonds to attract funds from investors. In general, bonds have lower interest rates than debentures as they are backed by the security and timely returns are guaranteed. The lower interest rate represents the reduced credit risk. Bondholders are usually given precedence during the time of liquidation. Bonds are long-term investments in comparison to debentures when it comes to tenure time. However, the issuing business or entity mostly decides the tenure of the issue as per the requirements.
Non-convertible Debentures:
Non-convertible Debentures are a little similar to bonds and can be secured or unsecured debt instruments. Non-convertible debentures means the debentures that cannot be converted into shares of the entity. It is a common method for private enterprises to raise money for a variety of purposes through the issue of Non-convertible debentures. Investors must rely on the issuing company’s credit ratings and financial soundness in case of unsecured non-convertible debentures. Credit rating agencies are regulated by SEBI and they assign ratings based on the health and financial soundness of the entity, debt structure, borrowing and repayment history of the entity, etc. Some widely recognized credit rating agencies in India are CRISIL, CARE Ratings, India Ratings and Research Pvt. Ltd, and ICRA which assign ratings from AAA to D which can help investors in taking an informed decision.
Generally, higher-rated non-convertible debentures also known as investment-grade non-convertible debentures are preferred fixed-income investment options for investors. While the unsecured non-convertible debentures are not secured by any physical assets or security, bonds are backed by the issuer’s assets. Non-convertible debentures have a fixed tenure and interest is paid either quarterly, semi-annually, or annually and the principal is repaid at maturity to the investors. Non-convertible debentures are listed on Stock exchanges which makes them fairly liquid and can be sold in the market. One can invest in Non-convertible debentures through NCD Public Issues or purchase through the secondary market. Thus the high yields, liquidity, and fixed returns make non-convertible debentures a favorable fixed income investment option but it is advisable to invest in NCDs on the basis of one’s risk profile after thoroughly verifying the various parameters of the issuing company.
Unsecured non-convertible Debentures, on the other hand, provide you with a high-interest rate, but because they are unsecured, the level of risk is high. Thus the higher risk level is compensated by more interest rate (coupon rate). Non-convertible secured debentures are considered safer since they are secured by assets, which can be liquidated in the event of default. A rating agency evaluates the creditworthiness of entities, especially their potential to meet principal and interest payments on their debt, and assigns ratings from AAA to D based on the safety and security of instruments. One must check the issuer’s credit rating, its credibility to repay debt, the coupon rate on the Non-convertible debentures, the structure and duration of the issue, etc. before investing in NCD. Find the best NCDs to invest in at TheFixedIncome.com and start investing in fixed income securities.
Non-convertible Debentures vs Bonds
The following table compares bonds and Non-convertible debentures.
Conclusion
Both a bond and a debenture are types of fixed income securities wherein entities borrow money, but they differ in how they are structured. In a way, all bonds are debentures, but not all debentures are bonds. For that reason, many times people use the words Non-convertible debentures and bonds interchangeably. A debenture lacks collateral, but a bond is backed by security. One can invest in NCDs surely for a higher return if one can evaluate the issuer’s creditworthiness and the issuer’s ability to repay the debt. In other words, Bonds are a better option for you if you are new to investing as they are secured and the chances of default are minuscule. Nevertheless, before investing in any fixed income securities like bonds or NCDs, it is advisable to read all the documents relating to the issue and understand all the terms and conditions attached to it.
