• A debenture when converted becomes stock.stock market analysis screenshot image by .shock from Fotolia.com
  
  When a corporation needs to raise capital for expansion or other purposes, one avenue taken involves the issuance of convertible debentures. The investor pays money to the corporation and, in return, receives the debenture. The terms of the debenture provide for payment of interest, a maturity date for repayment and a provision to convert the debenture into stock of the corporation. The terms of this provision determine the type of debenture.
  
  

Mandatory Convertible

• This debenture requires the investor to convert the debenture to stock in a specified amount and on a specified date. Due to the fact that the investor has no option to receive the initial investment, the interest rate of a mandatory convertible debenture is higher to compensate for this inflexibility. The investor can sell the shares of stock upon conversion but their worth may be less than the original investment. This type would be attractive to an investor seeking a higher yield who has confidence in the company's stock.
  
  

Contingent Debenture

• The provision for conversion in this debenture contains an event in the future that will trigger the investor's right to convert. The provision will not be mandatory but instead provide the investor with the opportunity to convert the debenture into a specified number of shares of stock. The contingency usually involves the price of the stock, with the contingency occurring upon the stock reaching a predetermined price.
  
  

Exchangeable Debenture

• This debenture has similar terms as the contingent except that it provides for conversion to any subsidiary or affiliate of the issuing corporation. This debenture would be used when the issuer has one or more such entities and the investor desires the options for different stocks presented by this type.