Debt Defined

• A debt, also known as a liability, is a short-term or long-term loan a company must repay at maturity or over specified installments.
  
  

Convertible Debt Defined

• A convertible debt product, often referred to as a hybrid debt instrument, is a bond with equity and debt features. A convertible bondholder can convert, or exchange, bonds into shares of equity, in accordance with the debt agreement. The convertible bondholder cannot vote for directors.
  
  

Reasons for Issuance

• If management is worried about losing voting control of its company, it can still raise money by selling convertible bonds rather than issuing common stock. Stockholders can vote for directors.
  
  

Rights of Debt Holders

• A convertible bondholder receives fixed interest payments during the loan term. The principal amount is refunded at maturity. A convertible bondholder who converts bonds into stocks receives similar rights as a shareholder.
  
  

Benefits To the Company

• Because convertible bondholders receive only fixed, low-interest payments, this frees up more operating capital for the company. The company can also deduct bond interest from its taxes.