Bonds and Debentures: You're the Lender Now

When you buy a debenture, you're lending money to a company. They promise to pay you interest regularly and return your money at the end. Simple enough.

The question is how sure you are that they'll keep that promise. And whether you'll be able to get your money out if you need it before the end.

Bonds vs debentures: what's the difference?

In everyday Nepali usage:

Bonds usually refer to government borrowing, like development bonds, treasury bills and savings bonds issued through NRB. Foreign employment savings bonds and citizen savings bonds have also been offered at times.
Debentures usually refer to company borrowing, mostly by commercial banks and some other companies.

The basic idea is the same: you lend money, you get interest (called the coupon), and you get your principal back at maturity.

The risk level is very different. The government of Nepal is generally considered a much safer borrower than any single company.

How bank debentures work in Nepal

Commercial banks in Nepal issue debentures fairly regularly, partly to meet regulatory requirements and partly to fund long-term lending. A typical bank debenture might look like this:

Face value: Rs 1,000 per unit
Coupon: a fixed annual rate, paid half-yearly or yearly
Term: often 7–10 years
Offered partly to the public through Mero Share, like an IPO
Listed on NEPSE after issue

The coupon is usually somewhat higher than FD rates at the time of issue, because you're locking your money up for much longer and taking more risk.

Debentures aren't fixed deposits

A lot of people treat bank debentures as "basically an FD with a better rate". They're not the same thing:

No deposit insurance. FDs at licensed banks are covered up to a limit by the Deposit and Credit Guarantee Fund. Debentures generally aren't.
Lower priority if things go wrong. If the issuer gets into trouble, depositors are typically paid before debenture holders. Many bank debentures are "subordinated", meaning they rank even lower.
Can't just withdraw. With an FD, you can break it early (with a penalty). With a debenture, you have to find a buyer on NEPSE.
Price changes. An FD's value doesn't fluctuate. A debenture's market price can.

What to look at

Who's borrowing?

A large, well-capitalised bank with low bad loans is a different risk from a small company with heavy losses. Read the issuer's financials and check any credit rating mentioned in the offer document.

Coupon rate and payment schedule

How much interest, and how often? Half-yearly payments give you cash flow more often.

Maturity

Many are 7–10 years. That's a long time. Ask yourself whether you're really sure you won't need this money for a decade.

Secured or unsecured

Is anything backing it? Most bank debentures are unsecured and subordinated. Read what that means in the offer document.

Special terms

Call option: can the issuer repay early? If interest rates fall, they might, leaving you to reinvest at lower rates.
Convertible: can the debenture be converted into shares? Under what conditions?

Can you sell early?

Debentures are listed on NEPSE, but trading is often thin. Some days, a particular debenture might not trade at all.

This means:

You might not find a buyer when you want to sell.
If you're in a hurry, you might have to accept a lower price.
The bid-ask spread (difference between buyers' and sellers' prices) can be wide.

Don't buy debentures with money you might need before maturity, unless you're comfortable with this.

The coupon isn't your total return

Several things affect what you actually earn:

Purchase price. If you buy a Rs 1,000 debenture on the secondary market for Rs 1,050, you'll still only get Rs 1,000 back at maturity. Your actual return is lower than the coupon suggests. If you buy at Rs 950, it's higher.
Tax. Tax is deducted from interest payments at source.
Broker fees if you buy or sell on NEPSE.
Reinvestment. What do you do with the interest payments? If you spend them, there's no compounding.
Inflation over 7–10 years can eat into the real value of both the interest and the principal.

The more accurate measure is yield to maturity: the total return you'd get if you bought at today's price and held until maturity, counting all interest and the final repayment. Some websites and brokers calculate it for listed debentures.

Interest rates and debenture prices

This is the part that confuses most people.

Say you bought a debenture paying 10% a year. Then interest rates in the economy rise, and new debentures start paying 12%. Nobody wants to pay full price for your 10% debenture when they can get 12% elsewhere. So its market price falls.

The opposite also works. If rates fall to 8%, your 10% debenture becomes more attractive, and its price can rise.

If you hold to maturity, these price changes don't matter. You still get Rs 1,000 back, assuming the issuer pays. But if you need to sell early, they matter a lot.

Government bonds

For ordinary investors, government savings bonds (when offered) are generally considered among the safest options in Nepal, because they're backed by the government. They usually pay less than corporate debentures for that reason. Look out for announcements from NRB, and remember that availability, terms and eligibility change from issue to issue.

Where debentures can fit

Debentures can be a reasonable part of a portfolio, especially for:

People who want steady, predictable income
Retirees or those close to retirement
The "stable layer" in a diversified portfolio (see my diversification post)

They're less suitable for emergency money (too hard to access) or for people who don't understand the issuer's risks.

Bottom line

Read the offer document, understand who you're lending to, think hard about whether you can hold for the full term, and don't put too much with one issuer. And don't let the phrase "fixed income" convince you your principal is guaranteed. It's fixed income only as long as the borrower can pay.

General information, not personal financial advice. Rules, rates and fees change, so check with the official source (SEBON, NRB, CDSC, IRD or the Nepal Insurance Authority) before you act. Have a question? Leave it in the comments.