Debt vs. Bonds: Understanding the Key Differences

Debt, according to Forbes' Investopedia, is an amount of money borrowed by one party from another. Companies will often take on debt in order to invest in materials and equipment they need, but for which they do not have the available funds.

Debt

Debt can take many forms: loans, commercial paper and bonds. Bonds are one way a company can raise capital to grow its business.

Bonds

A bond is an agreement in which a company agrees to either pay back the value of the bond with interest after a certain period of time, or promises to make regular interest payments on the value of the bond.

Bonds as Instruments

Bonds are bought and sold on the commodities markets and are a way for a company to get private financing. They may offer a higher rate of interest for more secure terms than an investor can get elsewhere, or cost the company less in interest than it would pay to a bank or lender.

Bonds as Debt

All bonds are a form of debt, but not all debts are bonds. Bonds are often only a part of how a company or project obtains funding. Most commercial lenders will not fund 100 percent of a project, which means that the company must either have cash on hand to contribute or must raise additional funds. Bonds can be a source of those funds.

Benefits

Bonds have certain tax benefits for both the issuer and the holder. It is not just companies that use bonds for fundraising purposes; municipalities often use them to fund projects like schools, hospitals and other public works, helping to keep local sales and property taxes lower.