Differences Between Notes & Debentures

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You can earn money through debentures and notes.
You can earn money through debentures and notes. (Image: Jupiterimages/BananaStock/Getty Images)

Debentures and notes are some of the methods of investing money in modern commerce. Earning money from debentures and notes can be quite lucrative if you have the knowledge about this type of investment. However, you must first understand what notes and debentures are and how they differ from each other. There are various characteristics that differentiate debentures and notes.

The Basics

A note or a promissory note is purely a negotiable instrument. It is a way through which one party or issuer creates and writes an unconditional promise to pay an amount of money to the other party at a determined future date under specific terms. A debenture is an unsecured bond that is typically backed up only on the basis of the good name and credit history of the issuer.

Investment Size

A note is generally issued and used by individuals or small entities, whereas a debenture is mostly used by large corporations as a form of investment, involving substantial amounts of money. A note generally involves less capital than a debenture.

Debt Security

A note is generally backed by a legal claim on some specific assets in case the issuer defaults. A note is therefore a secured bond. On the other hand, debentures are unsecured bonds and are not backed up by any specific assets. If the issuer fails to honor the payment, the debt holders will try to attach the assets of the company to recover their money. Hence, in the U.S., a debenture is considered to be an unsecured corporate bond. A note is considered to be a secured, negotiable instrument.

Rate of Return

A debenture usually issues higher returns due to the risk involved. A note generally offers a lower return because it is secured. Real estate often serves as collateral for a promissory note.

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