Convertible Debentures - Essay Example

Convertible Debentures Companies have several reasons why they choose to issue convertible debentures. First of all, with convertible debentures the cost of borrowing is lower as compared with other debt instruments because the buyer has the option of converting it to equity (Business Finance , par.2). This means that the company does not have to pay huge interest payments to the buyer. The investor is willing to accept lower interest rates with convertible debentures as compared with a straight debt because they will have the right to convert it to equity at maturity.

Another reason why companies prefer convertible debentures is due to statutory regulations. Some small companies are not able to meet the financial parameters for raising equity; thus, convertible debentures are issued instead of selling shares of stocks (Market Outbox par.3). Another motive of corporations for issuing convertible debentures is that they are able to raise equity without giving up control of ownership until such time that the debentures are converted into shares of stock. Furthermore, with debentures, the assets of the company will not be tied up unlike other forms of debt which require assets as collateral for the loan (Business Finance ,par.2). It is believed that issuing convertible debentures is a good alternative for companies who want to raise capital in short term intervals.

It is win-win solution for both the issuer and the investor. It is attractive to investors because of the guaranteed interest payments and an option to convert to equity if the price of the stocks goes up. The company on the other hand is able to enjoy lower interest payments and can offer their shares at a premium based on the present value in the future.Works CitedBusiness Finance. "Convertible debenture." 31 August 2011. businessfinance.com. 1 September 2011 .Market Outbox. "Market Outbox - The knowledge of finance." 2011. marketoutbox.com. 1 September 2011 .