Theoretically, the Convertible Debenture's market price should not fall down lower than its intrinsic value (book value or asset-based value). The intrinsic value is calculated by multiplying the number of shares converted at face value with the current market price of common stock.
Usually, Convertible Debentures offer more safety to the investor compared to Common Shares or Preference Shares.
In case of Convertible Debentures, Short Selling can be done and by short selling, the market value of a stock comes down, and this lets the Convertible Debentureholder to make a claim for additional stocks by the help of which more Short Selling can be done. This is termed as death spiral financing.
Convertible Debentures are suitable for investors who look for significant potential in terms of increase in asset value (appreciation) compared to that yielded by Bonds and more earnings than Common Stocks provide.
In this era of Online communication, it is possible to obtain plenty of information regarding Convertible Debentures by a few clicks of mouse. Before initiating any substantial investment, it is prudent to seek suggestions of the financial experts who have a deep knowledge about Convertible Debentures. Before conversion of Convertible Debentures into Common Stocks or shares, it is feasible to have a clear insight related to the potential changes in earnings and the relative gains.
Convertible Debentures can usually be categorized into the following types:
