In securities, a bond refers to a debt instrument between the bond issuer and the bondholder that's based upon a written contract, called a bond indenture. The contract specifies the repayment terms of the bond agreement and obligates the bond issuer to pay the bondholder the loan principal at a fixed interest rate over the course of the bond. This payment is made on a specified date, called the maturity date. Although a serial bond and a debenture bond both have to be repaid, the basis for their issuance is quite different.
A serial bond is a type of bond issue in which the principal bond amount is repaid over the life, or duration, of the issue. The life of the serial bond is also called its maturity period. With a serial bond, the underlying asset of the bond depreciates due to use or because the usefulness, competitiveness or value of the asset has significantly declined. This is called obsolescence. Payments are made in regular installments and are arranged in such a way as to ensure that the outstanding principal on the bond does not exceed the current value of the asset.
A debenture bond is a type of unsecured security that's backed only by the reputation or integrity of the borrowing entity. Debenture bonds can be issued by a government, municipality or company. A debenture bond issued by a corporation is commonly referred to as a corporate bond and its issuance is based solely upon the reputation, and perceived value, of the issuing corporation. An example of a government debenture is a Treasury bond, or T-bond.
The purpose of issuing bonds is to raise capital. The issuance of a serial bond is based upon an underlying asset. The owner of the asset can raise capital equal to the value of that asset. This can be a significant sum in some cases, depending on the nature of the asset. For debenture bonds, issuance of the bond relies on the reputation of the bond issuer. This may limit the amount of capital that can be raised if potential bondholders place a limited, or even negative, value on the reputation or integrity of the bond issuer. This is one of the reasons why corporations work to protect and nurture the public reputation of the company. The perception of the integrity of the company can impact its ability to raise capital via the issuance of bonds.
A serial bond is secured by a specific asset. As such, nonpayment on the part of the bond issuer allows the bond holder to claim possession of that asset as payment of the unpaid debt. Since debenture bonds are based upon the reputation of the bond issuer, no specific asset is pledged for the debt. Instead, if the bond issuer fails to make payment, the bondholder must pursue seizure of the bond issuer's assets as a general creditor of the bond issuer via legal proceedings in court.
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