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What is convertible debt?

Convertible debt is a type of debt security that can be converted into a predetermined amount of the underlying company’s equity at certain times through the life of the debt security. The convertible debt would have a stated conversion rate like the debt would convert into 10 shares of common stock.

However, until the debt is converted into equity of the company, investors will typically earn a fixed interest rate (e.g. 10%). Convertible debt will typically pay a lower interest rate compared to more traditional debt (i.e. bonds or loans).

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