Difference between Convertible and Non-convertible debentures

Debentures are referred to as a type of long term debt instrument that is not backed by any collateral. In other words, debentures are not secured or lack any kind of security. Along with bonds, debentures are one of the most popular debt instruments.

There are different categories of debentures based on properties such as convertibility, redeemability, transferability, etc.

Based on convertibility, there are two kinds of debentures which are convertible and non-convertible debentures.

Convertible debentures are debentures that can be converted into equity of the company. In case of non-convertible debentures, they cannot be converted into equity shares of the company.

Let us look at some of the points of difference between convertible and non-convertible debentures

Convertible Debentures

Non-convertible debentures

Definition

Convertible debentures are those type of debentures that can be converted into equity shares of the company

Non-convertible debentures are those debentures that cannot be converted into equity shares of the company

Rate of Interest

Convertible debentures have low rate of interest

Non-convertible debentures have high rate of interest

Value at maturity

The value of maturity of convertible debentures is dependent on the stock price of the company at that time, which means a high stock price will give higher returns while a low stock price will give low returns

The value of non-convertible debentures is fixed and hence they will receive fixed returns on maturity

Effect of market conditions

During bad market conditions, the holders of the convertible debentures have the option to convert into equity shares

During bad market conditions, the non-convertible debentures cannot be converted and can only be redeemed at maturity

Status

Holders of the convertible debentures enjoy dual status as they can be creditor as well as owner of the company

Holders of the non-convertible debentures are only creditors of the company

Risk factor

Convertible debentures are less risky

Non-convertible debentures are riskier compared to convertible debentures

This article was all about the topic of Difference between Convertible debentures and Non-convertible Debentures, which is an important topic of study for Commerce students. For more such interesting articles, stay tuned to BYJU’S.

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