Question

What are the convertible and non-convertible debentures?

Hint:

Convertible debentures offer the potential for capital appreciation, while non-convertible debentures offer fixed returns and no opportunity for equity conversion.

Answer 1

Step 1: Understanding Convertible Debentures.
Convertible debentures are a type of debenture that can be converted into equity shares of the issuing company after a certain period. The conversion is typically done at a predetermined price. Convertible debentures provide flexibility to the debenture holders to exchange their debentures for shares, thus benefiting from potential growth in the company's equity value.
Step 2: Understanding Non-Convertible Debentures.
Non-convertible debentures are fixed-interest debentures that cannot be converted into equity shares. These debentures offer a fixed rate of interest and have a fixed maturity date, at which the principal amount is repaid. They are typically used by companies that do not wish to dilute ownership by issuing additional shares.
Step 3: Key Differences:
- Convertible debentures offer the option to convert them into equity shares, whereas non-convertible debentures do not.
- Convertible debentures have the potential for higher returns if the company’s shares increase in value, while non-convertible debentures provide fixed returns.
Step 4: Conclusion.
Convertible debentures give debenture holders the right to convert their investment into shares, whereas non-convertible debentures remain as debt throughout their life.