We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.

What Are the Pros and Cons of Convertible Debt?

By K. Kinsella
Updated Feb 11, 2024
Our promise to you
WiseGeek is dedicated to creating trustworthy, high-quality content that always prioritizes transparency, integrity, and inclusivity above all else. Our ensure that our content creation and review process includes rigorous fact-checking, evidence-based, and continual updates to ensure accuracy and reliability.

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

Editorial Standards

At WiseGeek, we are committed to creating content that you can trust. Our editorial process is designed to ensure that every piece of content we publish is accurate, reliable, and informative.

Our team of experienced writers and editors follows a strict set of guidelines to ensure the highest quality content. We conduct thorough research, fact-check all information, and rely on credible sources to back up our claims. Our content is reviewed by subject-matter experts to ensure accuracy and clarity.

We believe in transparency and maintain editorial independence from our advertisers. Our team does not receive direct compensation from advertisers, allowing us to create unbiased content that prioritizes your interests.

Convertible debt refers to loan agreements that include a provision allowing the creditor to convert the debt into an equity share in a piece of property or a publicly traded company. For creditors the pros of convertible debt include minimal principal risk and the opportunity for growth while the downsides include low-income payments. A convertible debt is less expensive for a debtor to manage in the short-term but in the long-term, it could prove to be quite costly.

In many cases, convertible debt agreements take the form of corporate bond offerings. The bondholders have the opportunity to change these debts into company shares at a specific date in the future. If the company goes bankrupt prior to the conversion then the claims of bondholders on the firm's assets are settled before shareholders have a chance to claim any assets. Therefore, convertible debts expose investors to lower levels of principal risk than stocks. Additionally, if the firm continues to grow then the bondholders experience the upside of the firm's growth by converting the debt into equity.

In the investment arena, reduced levels of risk are normally accompanied by reduced earning potential. Therefore, the yields paid on convertible debts are much lower than on standard bond products. Furthermore, while convertible bonds are relatively safe investments, in many instances both bondholders and shareholders lose some or all of their investment when a firm becomes insolvent. Some banks write convertible mortgage products that provide the bank with a share of ownership in the borrower's property. When home prices are rising such loans are attractive to lenders; if home prices fall, then the debt balance may exceed the property value.

Companies can keep borrowing costs low by issuing convertible rather than standard bonds since the interest payments on these debts are much lower than on conventional debts. In the long run, convertible debt agreements can prove costly to debt issuers if the company increases in value and the creditor decides to activate the conversion option. Conversion agreements enable the creditor to exchange the bonds for a specific number of shares but the more those shares are worth, the more money the debt issuer stands to lose as a result of the conversion.

Borrowers who take out convertible mortgages often pay lower rates of interest than people who take out conventional loans. In the short-term, this means that these borrowers can finance expensive properties while keeping their monthly payments low. In the long-term, if the property prices rise then much of the property owner’s equity is lost to the lender as a result of the debt conversion.

WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Discussion Comments
WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.

WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.