Question

Explain types of debentures from the point of view of convertibility.

Hint:

Convertible = can turn into shares; Non-convertible = remain debt until maturity.

Answer 1

From the point of view of convertibility, debentures are classified into two main types. The first type is convertible debentures. These debentures can be converted into shares of the company after a specified period, either fully or partially. Their conversion terms are stated at the time of issue, and conversion gives the investor an opportunity to become a shareholder. The second type is non-convertible debentures. These cannot be converted into shares and remain a debt instrument until maturity. Non-convertible debentures usually offer a higher rate of interest because they lack the benefit of conversion. These two types provide companies and investors with flexible financing and investment options.