ACCA Financial Management (F9) Certification Practice Exam

What do holders of convertible loan notes have the option to do?

1. Convert them into debt securities.

2. Convert them into new types of loans.

3. Convert them into equity shares in the company.

4. Convert them into cash at any time.

The correct answer is: Convert them into equity shares in the company.

Holders of convertible loan notes have the option to convert them into equity shares in the company. This feature provides an opportunity for investors to trade their debt instrument for ownership in the company, which can be advantageous if the company's value increases. The conversion typically occurs at a predetermined conversion rate, allowing investors to potentially benefit from appreciation in the company's stock price. This option is particularly attractive during periods of growth, as it gives investors a chance to participate in the company's future success. This unique characteristic distinguishes convertible loan notes from ordinary debt securities, as they offer a pathway to equity ownership rather than merely functioning as a fixed-income investment. Unlike some other options in the question, which do not accurately reflect the nature of convertible notes, the conversion into equity aligns with the features and benefits of these financial instruments.