Debentures are unsecured debt instruments which are issued by the company to the general public; in case of debentures, the debenture holder gets a fixed rate of return for his or her investment and in case of a company getting bankrupt debenture holders gets preference in repayment of capital over preference shareholders and equity shareholders. A debenture is of many types out of which convertible and non-convertible debentures are widely issued by the companies to the investors. In order to understand both terms better one should know the difference between the two –
Convertible VS Non-Convertible Debentures
Meaning
In case of convertible debentures, the debenture holders get right to convert his or her debentures into equity stock of the company while non-convertible debentures as the name suggests are those which cannot be converted into equity stock of the company.
Rate of Interest
The rate of interest on convertible debenture is low because they have the option to convert their holdings into equity while the rate of interest on non-convertible debentures is high because they do not have any option to convert their holding into equity and hence they require a higher rate of return on their investment.
Value at Maturity
In case of convertible debentures the maturity value is dependent upon the stock price of the company at that time and hence if stock price is high they will get higher value at maturity and if stock price is low they will get lower value at maturity whereas in case of non-convertible debentures they will get fixed value at maturity as its price is not dependent on the movement of stock price of the company.
Effect of Bad Market Conditions
When the economy is in trouble and the company is not earning profits than the company may default on interest payment as well as capital repayment of debentures. In case of convertible debentures, they have the option to convert their holding into equity and can sell it in open market but as far as non-convertible debentures are concerned they have no option but to wait till maturity and hope that company pays interest as well as repay the capital back to them.
Creditors and Owners
In case of convertible debentures the holders enjoy both that is being the creditor of the company and after some time being the owner of the company whereas in case of non-convertible debentures the holders are only creditors of the company and they can never be the owners of the company.
As one can see from the above those convertible and non-convertible debentures have many differences and any investor looking to invest should carefully read the above points and then decide whether to invest in these instruments or not.