A type of loan that can be converted into equity or ownership in a company. This means that instead of the loan being repaid with interest, the lender can choose to convert the loan into shares of stock in the company.
Companies need to be careful when considering convertible debts since, as much as it has its advantages, it also presents risks of bankruptcy.
Types of convertible debts
There are three types of convertible debts. These are: vanilla, mandatory, and reverse convertibles.
Vanilla convertibles involve converting bonds to equity at an investor-company agreed rate and time.
On the other hand, mandatory convertible debts make it compulsory that investors go ahead to turn their bonds to shares when they mature.
The third type of convertible debt which is the reversible type allows investors to go back and forth on buying bonds using cash or by converting them to shares.