Bonds and NCDs (Non-Convertible Debentures) are both types of debt instruments that entities use to raise capital from investors. They have similarities but also some key differences. Let's explore each of them:
- Bonds:
Bonds are debt securities issued by governments, municipalities, corporations, or other entities to borrow money from investors. When an investor buys a bond, they are essentially lending money to the issuer in exchange for regular interest payments and the promise of repayment of the principal amount at the bond's maturity date.
Key features of bonds:
Fixed Interest Payments: Bonds typically pay a fixed rate of interest (also known as the coupon rate) to the bondholder at regular intervals, such as semi-annually or annually.
Maturity Date: Bonds have a specific maturity date when the issuer is obligated to repay the face value (principal) of the bond to the bondholder.
Tradable: Bonds are often traded on the secondary market, allowing investors to buy and sell them before their maturity date.
Convertibility: Unlike NCDs (as discussed below), traditional bonds are usually not convertible into equity shares of the issuing company.
- NCDs (Non-Convertible Debentures):
NCDs are similar to bonds in that they are also debt instruments issued by corporations or financial institutions to raise capital. However, the key difference is that NCDs cannot be converted into equity shares of the issuing company, making them "non-convertible."
Key features of NCDs:
Interest Payments: NCDs provide fixed or floating interest rates to investors, similar to bonds. The interest payment frequency can vary, depending on the terms of the NCD.
Maturity Date: NCDs have a specific maturity period, and the principal amount is repaid to the NCD holder upon maturity.
Non-convertibility: As mentioned earlier, NCDs cannot be converted into equity shares, which means they remain pure debt instruments.
Listed and Unlisted: NCDs can be listed on stock exchanges, making them tradable in the secondary market. Some NCDs are also issued in the form of unlisted instruments, which are not traded on exchanges.
Higher Yields: NCDs issued by corporations or financial institutions might offer higher interest rates compared to traditional bonds to attract investors.
In summary, both bonds and NCDs are debt instruments used by entities to raise capital from investors. Bonds generally have fixed interest payments and are often convertible into equity shares, while NCDs are non-convertible and can provide relatively higher yields. Investors should carefully consider the creditworthiness of the issuer, the interest rate offered, the tenure of the instrument, and their own risk appetite before investing in either bonds or NCDs. Additionally, it's essential to review the terms and conditions of the specific bond or NCD offering before making any investment decisions.