What Are Convertible Debentures?

A convertible debenture is a kind of debenture that can be converted into stock at the option of the holder or even the issuer at a specific date in the future time to come. The buyer has the power to convert the debenture into stock under specific circumstances that is why the seller is able to borrow at a lower cost.

Convertible debentures include both the categories of secured and unsecured debentures.  The major highlight of convertible debentures is the option that is provided to the debenture holder that gives them the authority to exchange their debentures for shares in the company with the condition of few limitations and restrictions.  These limitations and restrictions are promulgated in the regard of the period that allows the option to be exercised and after which the option becomes invalid.  This option empowers the debenture holder to become a shareholder of the company that owes him debts.  The most appropriate time for a debenture holder to convert his debentures into shares is the time when the company is showing a sound financial performance and is generating great margins of profits.  Nevertheless once the debentures are exchanged with shares, they could not be converted back to debentures.  That is why these debentures are called convertible debentures.