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With the invariably lower initial interest burden a growing expanding firm would be in a better position to service the debt, debentures. Subsequently, when it will do well, it can afford the servicing of the financing instrument after conversion.

Secondly, they generate financial synergy. The assessment of risk characteristic, of a new firm is costly and difficult. Provide again of risk assessment. They have two components: straight debenture, and call option. In case the firm turns the former will have a low value while the latter will high value anti vice versa if turn out to be relatively risk free. As a result, the required will not be very sensitive risk. In other words, firms with widely varying risk, can issue on terms whereas the cost for straight debentures would be substantially different. Thus convertible debentures offer a combination financial synergy risk synergy to companies to obtain on more favorable terms.

Finally, convertible debentures can mitigate agency problems associated with financing arising out of demand of equity-holders and debentures holders lenders. The focus of the latter is using default risk whereas the former would like the firm to undertake high risk projects. This conflict can be resolved by the issue of convertible debentures bonds. The debenture holders would not impose highly restrictive covenants to protect the interest and firms can undertake profitable investment opportunities.


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