There are various types of debentures in the market. Types based on different categories, like types based on Transferability and Records, Redeemability, Security, and Convertibility. Convertible and Non-Convertible Debentures are under the Convertible category. Therefore, today’s topic is the ‘Difference Between Convertible and Non-Convertible Debentures’.
What is a Debenture?
Before going through the topic it is important to understand what debenture is and what is its impact on the financial market. The debenture is basically a long-term debt instrument with fixed interest rates. When a company wants to raise funds for extension and growth but doesn’t want to raise share capital, issue debenture.
What are Convertible and Non-Convertible Debentures?
If a company needs to borrow money, it issues debentures to the public. In Convertible Debenture, investors can convert debentures into shares but the convertible figure is pre-decided. Oppositely, in Non-Convertible debenture or NCD, debentures are non-convertible into shares.
Let us now discuss the difference between Convertible and Non-Convertible Debentures based on certain factors.
Based on Interest Rate:
Since convertible debenture holders have the advantage of converting them into the company’s share, it possesses a lesser interest rate. On the other hand, Non-convertible debenture doesn’t possess any such advantage, so it usually comes with a higher interest rate than convertible debentures.
Based on Risk:
Convertible debenture holds a lesser risk than a non-convertible debenture. In case there is a downtrend, the economy is in trouble, there might be a time when the company is unable to pay interest or defaults in making payment of interest, having a convertible debenture one can convert the debenture into the shares of the company. Usually, shares hold a higher value than the convertible debenture.
In reverse, non-convertible debenture holds a higher risk. Since the holders of this debenture cannot convert debentures into shares, they have only one choice to hold it till maturity. If the company defaults in making payment of interest, the holders can seize the proportionate assets of the company.
Effect of the Equity Market:
As convertible debentures can be converted into equity shares, it’s the interest rate, return amount can be affected by the performance of the equity market trend.
On the other side, non-convertible debenture doesn’t affect by equity market trends. They have no direct relation to equity market performance.
FAQs on Convertible and Non-Convertible Debentures
Convertible debentures are those that investors can convert into equity shares after a certain period of time, while non-convertible debentures do not have this option.
A non-convertible debenture (NCD) is an unsecured debt instrument issued by companies for a fixed tenure at an agreed rate of interest to raise funds from investors.
A convertible debenture allows its holder to convert it into equity shares of the issuing company at any stage after the completion of its maturity period as per predetermined terms and conditions.
Corporate bonds are generally divided into two categories – convertible and non-convertible bonds. Convertible corporate bonds allow holders to convert them into stocks at certain intervals determined by the issuer, while non-convertible corporate bonds cannot be converted into shares or equities under any circumstances.
Conclusion
These are some basics difference between convertible and non-convertible debentures, based on different aspects. We have discussed all of them in detail. You need to choose the one where you will invest based on your requirements and the affecting factors discussed.