What are convertible debentures?

Convertible debentures are a specific type of debt security that grants the holder the option to convert the debenture into a predetermined number of equity shares, typically of the issuing company. This feature allows investors to benefit from the potential appreciation in the company’s stock price while also providing the safety of a fixed income investment, as they pay interest like traditional debentures.

The appeal of convertible debentures lies in their dual nature; they are initially a form of debt, offering consistent interest payments and lower risk compared to equity. However, when the company's performance is promising and its share price rises, the investor can convert their debenture into shares, potentially enabling significant capital gains. This conversion feature provides a strategic advantage, aligning the interests of debenture holders with those of equity shareholders as the company's value increases.

Other options present alternative financial instruments or measures that do not encapsulate the nature of convertible debentures. The option referring to insurance contracts linked to stock performance does not relate to the fixed income and conversion aspects of debentures. Short-term loans that cannot be converted do not possess the conversion feature that characterizes convertible debentures. Lastly, equity shares that pay fixed interest inaccurately describe shares, as equity typically entails variable dividends rather than fixed