Reverse convertible securities

A reverse convertible security is a type of convertible security where a bond or short-term note can be converted to cash, debt or equity at a set date by the issuer based on an underlying stock. In effect it is a type of option on the maturity date where the bond can be converted to shares or cash. For the investor they get the advantage of a steady stream of income due to the payment of a high coupon rate, but will either get back their principle (par value) or a predetermined number of shares in the underlying stock if they are lower. The coupon rate is typically higher because the investor participates in the risk that the underlying shares are lower at the maturity date.

In the context of structured product or security, a reverse convertible can be linked to an equity index or a basket of indices. In such case, the capital repayment at maturity is cash settled, either 100% of principal, or less if the underlying index falls conditional on barrier is hit in the case of barrier reverse convertibles.

Description

Features

These are bonds or short-term coupon bearing notes, which are designed to provide an enhanced yield while maintaining certain equity-like risks. Their investment value is derived from the underlying equity exposure, paid in the form of fixed coupons. Owners receive full principal back at maturity if the Knock-in Level is not breached (which is typically 70-80% of the initial reference price). If the underlying stock falls in value, the investor will receive shares of stock which will be worth less than his original investment.