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Companies always need financing for their projects and investments. For this purpose, some companies, especially big ones, create financial instruments like debentures. Debentures are debt instruments much like bonds and notes. There are two types of this: convertible and non-convertible.

What’s the difference between the two? Convertible bonds can be exchanged to equity shares at some trigger point while a non-convertible debenture is a pure bond which will just give regular interest income. However, among the two, the non-convertible offers a higher rate of interest.

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.

If you want to invest in companies in the technology industry, many of them are now offering convertible bonds. In the past, they do not offer debenture, only an equity stake in them. With this type of bond, you can now get the opportunity to profit from their potentially explosive growth. When they are in their rapidly growth stage, you can convert the bonds you have into shares of that company since the shares will be of much higher value. You can then ride the price ascent of the shares and then sell them for a huge profit after.

No doubt, more and more stock players are eager to invest in these because of the higher returns of investment as compared to other types of bonds. Since these bonds follow the movement of stocks, there is a great promise of bigger returns.

Even if you don’t convert the bond into stocks, you still get a definite yield from the bonds, which are much higher than other investment instruments like bank deposits. You also get back your principal investment. These features make these bonds a solid investment option for investors. They are also popular with those who don’t like volatility in their investments. These bonds offer a good and consistent return and an option to participate in higher return with its conversion feature.

Before you invest in these, you better learn more about them. Also, familiarize yourself with stocks too, so that you know what you are getting into when you exercise the conversion feature. In this way, you will be able to minimize the investment risks and be able to take advantage of the potential returns.

The essayist who wrote this exposition has determined an expert named 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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