Convertible Debentures

Convertible debenture is a debt instrument that can be converted into stock at the option of the holder or the issuer.

Instead of receiving payment, the buyer of the debenture can choose to take stock in the company. With convertible debentures, the cost of borrowing is lower for the seller since the buyer has the option of converting it into stock. Debentures are tools used by large companies to raise capital for their projects and operations. This is known as a debt offering since the company literally goes into debt to the investors until the price of the debenture is paid back, plus interest, or until it is converted into stock. The company must record this debt on its balance sheet. If bankruptcy occurs, the debenture holders are considered creditors and must be paid back by the company’s remaining assets. Debentures are a way for companies to raise capital without having to use their assets or give up ownership in their company. This leaves their assets free to do other things to generate capital for the business.

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