A reverse convertible is a structured product where the note will pay a set amount of interest upon maturity, but the principal paid at maturity will be dependent on the price of an underlying security, often a stock price or a commodity index. So if the underlying security falls in value, the investor will receive shares equal to the equilivant amount of shares to the initial investment.
Reverse convertible example:
Coupon Rate: 10.00%
Basis: Annual Bond Basis (30/360)
Reference Share: XYZ Bank
Maturity Date: 1 year term
Initial Share Price: The closing market value of the Reference Share on the Initial Fixing Date.
Conversion Price: The Initial Share Price.
Final Share Price: The closing market value of the Reference Share on the Valuation Date.
Redemption Amount: At Maturity Date, the holder of note receives for each Denomination either:
• The Cash Delivery Amount, if the Reference Share never closed below the Downside
Limit Price from the Initial Fixing Date to the Valuation Date (included) OR if the Final
Share Price is at or above the Conversion Price
• Otherwise, the Physical Delivery Amount.
Physical Delivery Amount: A number of Reference Shares per Denomination equal to the Denomination divided by the Conversion Price.
So for example, if the stock price of XYZ was initially $100, and in one year the stock price was $115. The holder of a $1000 note would receive $100 for the 10% coupon, and the $1000 principal.
Now, if the stock price were $80 at the end of one year. Then the holder of the note would receive $100 for the coupon. But would receive $800 worth of stock.
This is a simple example, reverse convertibles can have other types of features such as downside protection, regular coupons, basket underlyings & physical or cash payment at maturity.
A reverse convertible is created by combining a zero coupon bond and selling a put option. The premium from the put option is used to create the coupon that is paid at maturity.
For more information see our pricing plans.