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Debenture refers to a debt instrument utilized by some large companies to borrow money. The term is also used interchangeably with note, bond or loan stock in several countries. Debentures are classified into two: the convertible debenture or convertible bond, and the non-convertible kind.

A convertible bonds has two distinct features that make them popular among investors. First is the bond function that will allow them to get consistent interest payments and second is the equity feature which allows them to convert the bond into a predetermined amount of shares at some point during the duration of the bond. Non-convertible debentures are simply bonds with a greater interest rate return. However, they don’t offer the equity feature of a convertible bond.

Investing in these has a number of advantages which makes it highly appealing and popular to stock buyers all over the globe. As mentioned earlier, these bonds follow market share prices. This means that if stock prices go up, so do the bond prices. These bonds only go up to about two-thirds as compared to stock prices but during price declines, the same thing holds true. While bond prices may go down, they will just be half of the decrease in stock prices.

Convertible bonds are great for passive investors–investors who would just like to sit and collect income from interest until they reach the rate of bond conversion. In this kind of setup, their capital is preserved and they still receive regular interest income. If the stock price picks up, you can then convert these to ride the explosive growth of the company. You can get capital gains and dividend income when you convert the debenture to equity shares.

Convertible bonds also give you the opportunity to invest in technology stocks and receive income from them as well. While these types of stocks do not normally give dividends, this type of bond does so through yields. More and more small-capital and medium-capital companies, which hold great market potential, now offer these. And when you buy bonds from them, you will also profit from their growth. How? By simply converting these bonds to stock shares that have a higher value.

Investors continue to love convertible debentures because they have a good return on investment and they follow share price movement which can provide you with a much bigger return. Non-convertible debentures do not offer this feature.

The good thing with these types of bonds is that even if the conversion level is not reached, there is still a satisfactory return from the bond. What these offer is the best of both worlds: the safety feature of a bond and the potentially lucrative return of stocks. These are not very volatile, making it a great investment for those who like steady returns.

The important thing to remember before investing in these bonds is to study them and talk them through with your financial advisor. Also, you should learn a lot about stocks and bonds first so that you can properly deal with them.

The essayist who wrote this treatise has determined an expert by the name of Josh Yudell. Josh Yudell is also the Managing Director of a private equity fund and is credited with the creation and popularization of a funding vehicle known as a PSSO (Private Secondary Shareholder Offering).

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