Which debt instrument can be converted into equity?

• A. Convertible bonds
• B. Non-convertible bonds
• C. Debentures
• D. Mortgage bonds

Answer: (A)

Convertible bonds are debt instruments that include an embedded option allowing the holder to convert the bond into a predetermined number of shares of the issuing company, at a specified conversion price and within a defined window. This feature gives bondholders potential upside if the stock rises, since they can exchange their bonds for equity, while still receiving coupon payments until conversion. The other listed instruments do not carry this conversion feature by default: non-convertible bonds provide fixed cash flows only, mortgage bonds are secured by property and not meant to convert into stock, and debentures are typically unsecured debt without an equity conversion option. Because of the built-in conversion option, convertible bonds are the instrument that can be turned into equity.