Convertible debentures are long-term debts that are issued by companies to be converted to stocks for a certain tenure. Convertible debentures do not have a collateral supporting them and thus are unsecured bonds.
The lender, the bond holder earns interest on these long-term bonds and being able to convert it in to stock is a unique and flexible feature of convertible debentures. The convertible feature in turn is a security as it waives off certain risk.
A convertible debenture as a long-term loan can be converted to stock.
Debentures are hybrid products between debt and equity.
Debentures are unsecured irrespective of collaterals.
Convertible debentures are attractive to investors as they can be converted to equity in a long-term event of stock price rise. While obtaining a debenture a purchase agreement or trust indenture is prepared. It is an agreement between the company and the trustee who manages investors interest.
Interest or coupon rate is listed that could be fixed or floating paid by the company to the debenture holder.
The credit rating of the company and debenture is ascertained to offer interest on the debenture.
For non-convertible debentures, a maturity date is assigned as a part of the agreement.