Learn about debentures and convertible bonds

2.1.9 · Stock-Market › Equity & Fixed Income

Debenture KYA hota hai?

Ye kyun exist karta hai? Company ko cash chahiye bina owners ka control dilute kiye. Debt exactly wahi karta hai: lenders ko interest milta hai lekin koi vote nahi, koi profit share nahi — sirf fixed coupon ke aage kuch nahi.

Holder ke roop mein aapko kya milta hai:

Periodic coupon payments (jaise har saal face value ka 8%)
Maturity par wapas mili face value (par)
Ek priority claim: agar company liquidate ho jaaye, toh debt holders ko equity shareholders se pehle pay kiya jaata hai.

Convertible bond KYA hota hai?

Do key numbers:

Convertibles kyun exist karte hain?

Company ke liye: ye ek plain bond se lower coupon par borrow kar sakti hai, kyunki ye investor ko ek bonus deti hai — upside option. Sasta interest = attractive.
Investor ke liye: ek bond ki downside protection (agar stock flat rahe toh bhi coupons + principal milta hai) aur agar stock upar jaaye toh equity upside.

Convertible ko value kaise karein — first principles se

Ek convertible kam se kam do cheezein mein se jo zyada ho uske barabar hota hai, kyunki holder jo better ho wo choose karta hai:

$Convertible value \geq max (straight bond value B, conversion value P)$

Conversion value $P$ derive karna. Agar main convert karun, toh mujhe (conversion ratio) shares milte hain, jo current market price $S$ par hain:

$P = (Conversion ratio) \times S$

Ye step kyun? Kyunki conversion literally ek bond ko utne shares ke saath swap karta hai, aur har share $S$ par trade karta hai. Convert karne ke baad aapke paas kya hoga, ye sirf wahi count karna hai.

Straight bond value $B$ derive karna. Option ko ignore karo; isse ek normal bond ki tarah treat karo. Market yield $y$ par har cash flow ko discount karo:

$B = \sum_{t = 1}^{N} \frac{C}{( 1 + y ) ^{t}} + \frac{F}{( 1 + y ) ^{N}}$

Ye step kyun? Aaj se ek saal baad ka ek rupaya aaj ke ek rupaye se kam worth hai, isliye har future coupon $C$ aur final face value $F$ ko $(1 + y)^{t}$ se divide kiya jaata hai — time value of money. Ye pure "loan" worth hai, floor jisse convertible neeche nahi ja sakta (assuming no default).

$max$ kyun aur sum kyun nahi? Aap ek saath bond nahi rakh sakte AUR shares ke owner bhi nahi ho sakte — conversion ek swap hai. Aap higher-value branch choose karte ho, isliye guaranteed worth maximum hai. Market price is max se thodi upar hoti hai kyunki baad mein wait karke choose karne ka option ki extra value hoti hai.

Figure — Learn about debentures and convertible bonds

Worked examples

Debenture vs Convertible — ek nazar mein

Feature	Debenture (plain)	Convertible bond
Cash flows	Coupon + principal	Coupon + principal ya shares
Coupon rate	Zyada	Kam
Equity upside	Kuch nahi	Haan (conversion ke zariye)
Best when	Rates high hon, income chahiye	Stock rise hone ki ummeed ho
Holder ko risk	Default/interest-rate	Wahi + option expire ho sakta hai worthless

Recall Feynman: 12 saal ke bachche ko samjhao

Sochiye aapne apne dost ko ₹100 ek lemonade stand kholne ke liye diye. Ek debenture ek note hai jo kehta hai "main tumhe har saal ₹8 dunga aur 3 saal mein tumhara ₹100 wapas karunga" — ek simple loan. Ek convertible bond ek special note hai: "same deal, LEKIN agar lemonade stand super popular ho jaaye, toh tum apna loan ₹100 wapas lene ki jagah stand ki ek share ke liye swap kar sakte ho." Agar stand boom kare, tum shares lo aur ameer ho jaao; agar chota raha, tum bas apna paisa wapas lo. Tum better outcome choose karte ho — ye choice hi iske valuable hone ki wajah hai, aur isliye tumhara dost tumhe thoda kam interest pay karta hai.

Active recall

Debenture kya hota hai?

Ek long-term, usually unsecured debt instrument jo ek fixed coupon pay karta hai aur maturity par face value wapas karta hai; issuer creditworthiness se backed.

Ek plain debenture usually secured bond se higher-yielding kyun hota hai?

Iski koi collateral nahi hoti, isliye zyada risk → investors zyada coupon demand karte hain compensate karne ke liye.

Components ke terms mein convertible bond kya hota hai?

Ek straight bond PLUS issuer ke stock par ek embedded call option (shares mein convert karne ka right).

Conversion price ka formula

Conversion price = Face value ÷ Conversion ratio.

Conversion value P ka formula

P = Conversion ratio × current share price S.

Company convertibles ko lower coupon par kyun issue kar sakti hai?

Ye investors ko valuable upside conversion option deti hai, aur investors iske badle mein kam interest accept karte hain.

Convertible bond ki floor value kya hai?

Uski straight-bond value B (coupons + face value ka PV), assuming no default.

Convertible ke liye value relationship

V ≥ max(straight bond value B, conversion value P), aur usually option time value ki wajah se thoda upar trade karta hai.

Bond par se neeche tab trade karta hai jab?

Jab market yield > coupon rate ho (discount bond).

Convertible bond convert kab NAHI karna chahiye?

Jab conversion value P, bond ki redemption/face value se kam ho — coupons aur principal ke liye bond hold karo.

Liquidation mein pehle kaun pay hota hai, debenture holders ya shareholders?

Debenture (debt) holders — debt ka equity par priority claim hota hai.

Connections

Bond Valuation and Yield to Maturity
Time Value of Money
Options and the Call Option Payoff
Equity Shares vs Debt Financing
Credit Risk and Ratings
Capital Structure of a Company