Convertible debt is a financial instrument used by companies to raise capital. It is initially issued as a debt instrument, meaning the holder lends money to the issuer and earns interest, similar to a traditional bond. What sets convertible debt apart is the option it provides to convert the debt into equity, often shares of stock in the issuing company. The terms of the conversion—such as the conversion ratio and the conditions under which conversion can be triggered—are pre-established in the contract.\n\nFor example, a company might issue a convertible note at a certain interest rate with the provision that it can be converted into stock at $10 per share. If the company's shares trade at $15 in the market, converting the note into equity can be a profitable choice for the holder.\n\nConvertible debt is often used in early-stage companies or startups, as it allows them to secure funding while delaying stock valuation. The inclusion of a conversion option often makes this type of debt more attractive to investors, as it provides potential upside should the company's stock price increase. Terms such as 'Bond' and 'Equity' are closely related to convertible debt.