Convertible Debt

  

Categories: Bonds, Stocks, Trading, Investing

Want to turn cow patties into gold? Alchemists haven't figured out a way to make that happen, despite hundreds of years of efforts.

In finance, the next closest thing might be called convertible debt. In this situation, a company borrows money from a group or individual investor. The agreement isn’t to pay the money off with coupons or physical capital payments, like...14,000 fuzzy bunny slippers. Instead, they'll just pay off the debt as a normal vanilla debt...but they can convert the debt into shares of stock or equity at some point in the future. Or at least they have the option to do so, if the equity value makes sense to make that conversion. Otherwise, they have their debt, which has to be paid off according to whatever indenture details existed when the investors loaned the company their cash.

Why would a company borrowing money offer this convertibility option? Because it makes the cost of renting the money cheaper, usually. Like...suppose the market rates for straight debt are 6%. If the company offered the lenders the ability to convert into shares at, say, a 50% premium to where they're trading today, then the cost of that rent money might be 5%, or something like that, saving the company meaingful amounts of borrowing costs.

The more money saved...the more that can be poured into cow patty research.

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