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. There are various types of debentures in the market. Types based on different categories, like types based on Transferability and Records, Redeemability, Security, Convertibility. Convertible and Non-Convertible debentures are under the Convertible category. Therefore, today’s topic is the ‘Difference Between Convertible and Non-Convertible Debentures’.
Difference Between 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, debentures are non-convertible into shares.
The difference in the Interest Rate:
Since convertible debenture holders have the advantage of converting them into the company’s share, it possesses lesser interest rate.
On the other hand, Non-convertible debenture doesn’t possess any such advantage, so it usually comes with higher interest rate than Convertible debentures.
Based on the Risk:
Convertible debenture holds lesser risk than 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 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 higher risk. Since the holders of this debenture cannot convert debentures into shares, they have only one choice as to hold it till maturity. If the company defaults in making payment of interest, the holders can seize proportionate asset of the company.
Affected by the equity market:
As convertible debenture can be converted into equity shares, it’s 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 trend. They have no direct relation to equity market performance.
These are some basics difference between convertible and non-convertible debentures, based on different aspects.
Categories: Stock Market Basics