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Simple English definitions for legal terms
convertible debenture
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A quick definition of convertible debenture:
A convertible debenture is a type of loan that can be changed or converted into something else, like stocks. It is a type of bond that is not secured by any specific asset, but rather by the reputation and credit of the company that issued it. It is a way for companies to borrow money from investors and offer them the option to convert their loan into stocks in the future.
A more thorough explanation:
A convertible debenture is a type of debt security that can be converted into another security, such as stock. It is a type of debenture, which is a debt instrument that is not secured by a specific asset, but rather by the issuer's earning power.
For example, if a company issues a convertible debenture with a face value of $1,000 and a conversion ratio of 10:1, the holder of the debenture can convert it into 10 shares of the company's stock. This allows the holder to potentially benefit from any increase in the company's stock price.
Other types of debentures include:
- Subordinate debenture: a debenture that is subject to the prior payment of other debts
- Sinking-fund debenture: a debenture that is secured by periodic payments into a fund to retire long-term debt
- Convertible subordinated debenture: a debenture that is subordinate to another debt but can be converted into a different security
Overall, a convertible debenture provides flexibility for both the issuer and the holder, as it allows the holder to potentially benefit from the company's growth while also providing the issuer with a source of financing.