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Definition: Convertible Debenture
A Convertible Debenture is a type of a loan taken by the company such that the debenture can be converted into share of a company if the investor wants it. Such a loan provides the ability to a company to have easy access to capital and at a lower interest rate.
The lower interest rate is due to the fact that the loan can be converted to stock if the investor wants it. Another thing to notice is that a convertible debenture is not like a convertible bond, if the company goes out of business or files for bankruptcy then the fixed income security holders that is bond holders will be paid first and then the convertible debenture holders will be paid.
There are different types of convertible debentures:
a. Fully Convertible Debentures (FCD): A type of convertible debentures in which the entire debt can be converted into equity. The main difference between a FCD and CD is that the conversion can be forced by the company that has taken the loan.
b. Partially Convertible Debentures (PCD): A type of convertible debenture such that part debt is converted into equity.
c. Non-Convertible Debentures (NCD): A type of debenture that cannot be converted into equity.