Debentures and fixed deposits are two different ways of investing money through financial instruments. A debenture is an unsecured bond. Essentially, it is a bond that is not backed by a physical asset or collateral. Meanwhile, a fixed deposit is an arrangement with a bank where a depositor places money in the bank and is paid a regular fixed profit.
What Is a Nonconvertible Debenture?
Sometimes, debentures are issued with provisions that allow the holder to exchange the debenture for company stock. Nonconvertible debentures are unsecured bonds that cannot be converted to company equity or stock. Nonconvertible debentures usually have higher interest rates than convertible debentures.
All debentures have specific features. First, a trust indenture is drafted, which is an agreement between the issuing corporation and the trust that manages the interest of the investors. Next, the coupon rate is decided, which is the rate of interest that the company will pay the debenture holder or investor. This rate can be either fixed or floating depending on the company's credit rating or the bond's credit rating.
For non-convertible debentures, the date of maturity is also an important feature. This date dictates when the issuing company must pay back the debenture holders. The most common form of repayment is called a redemption out of capital, in which the issuing company makes a lump sum payment on the date of maturity.
What Is a Fixed Deposit?
When a depositor places money in a fixed deposit, the amount of profit or interest paid on the investment is fixed and will not increase or decrease at any time regardless of fluctuations in interest rate. The interest rate usually offered by fixed deposits is low compared to other investment forms because they are low-risk investments.
Fixed deposits typically have maturities from two weeks to five years. Fixed deposits cannot be redeemed early. In other words, money cannot be withdrawn for any reason until the time-duration on the deposit has expired. If money is withdrawn early, then the bank can charge an early withdrawal penalty or fee.
A very common example of a fixed deposit account is a certificate of deposit (CD).
(For more, see our Certificates of Deposit Tutorial.)