What Are Convertible Debentures Maturity Dates?

Convertible debentures are a means for corporations to raise large sums of money.

Convertible debentures are a way corporations raise large amounts of capital to fund their operations. They are sold to investors for an amount that represents principal. The corporation pays interest on the principal and then, at the maturity date, pays back the principal. The special feature of a convertible debenture is that the investor, instead of receiving the return of principal, can convert the debenture to stock of the corporation.

Terms

A convertible debenture is a contract.

Every convertible debenture has terms set out in great detail. The amount of interest and when and how it is paid is carefully explained. The provisions for the option to convert to stock, the type of stock and price are all explained. Finally, a maturity date for the convertible debenture is set.

Function

The maturity date is the expiration date.

The function of a maturity date is to set in advance the end date of the convertible debenture. It is generally several years in the future. It is especially important for a convertible debenture because the debenture normally provides for conversion to stock at any time during the life of the instrument. Thus the longer the maturity date, the more time for the stock to become more valuable than the principal.

Length

The maturity date marks the end of the opportunity to convert to stock.

There is no set formula to determine the length of a maturity date. That date is set by the corporation taking into account several factors. The purpose of a convertible debenture is to borrow money at a lower interest rate than availble through other methods. The reason an investor would buy a convertible debenture that pays less interest is the possibility of a extra profit by converting to stock.

Considerations

Convertible debentures are big business.

For the corporation, the longer the maturity date, the lower interest rate. That is the primary consideration for the corporation: low costs of borrowing money. For the investor, it is about return on principal. The maturity date and the stock conversion option are traded for the lower rate of interest. It is all about balancing risk in investing.

Potential

A long maturity date gives the investor great potential to make cash.

The maturity date sets the potential for the conversion to stock. After determining the maturity date, the potential investor examines the conversion terms. The determination then is what are the realistic circumstances such that a conversion will make financial sense. Is the lower interest rate worth taking the chance on conversion?

References

• BusinessFinance: Convertible Debenture
• Stock Market Investors: Convertible Bonds Basics