Convertible vs. Nonconvertible Debentures

Both convertible and nonconvertible debentures are debt instruments that are issued by companies. These loans are similar to bonds except that neither one of them are guaranteed by any type of collateral.

Convertible Debentures

Convertible debentures are a type of loan that is taken out by a company in which the lender can convert into stock at some point. The holder of the debenture could decide to hold it and collect the interest and principal payments. They could also decide to convert it into a certain number of shares of stock in the company. 

Nonconvertible Debentures

This is a similar type of loan except that it cannot be converted into shares of stock. Since individuals who take this type of debenture do not have the ability to convert it into stock and it is not secured, they will generally be able to get a higher interest rate. Companies who wish to issue this type of debt have to agree to paying more interest in order to attract investors. If the company that issues this type of debenture goes out of business, the bondholders in the company are able to receive payment first.

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