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Reverse Convertibles

What are Reverse Convertibles?

A Reverse Convertible is a bond with a very attractive interest rate. Given that this product is linked to a share (underlying share), coupons substantially exceed the market interest rate. In return for the high coupon, the investor also bears the risk from the share: at the end of maturity, the redemption of the Reverse Convertible is based on the price of the underlying instrument. If at the end of maturity the share price is above the initial value, the coupon and the nominal value are redeemed. If the share price at the end of maturity is below the initial value, the coupon is also redeemed, but the nominal value is redeemed in shares (physical delivery). The number of shares is based on their determined initial price. The remaining nominal value, which is below the value of one share, is redeemed in cash.

In addition to Reverse Convertibles with one underlying instrument, there are also Reverse Convertibles with more shares as underlying instruments. These multi-cash or multi-share bonds tend to pay higher coupons. The redemption of their initial value is based here on the share with the worst performance during the observation period. The coupon is redeemed as well, regardless of the trend of the underlying assets.

How do Reverse Convertibles work?

Reverse Convertibles are issued with an initially set fixed coupon which at the end of maturity pays substantially higher interest rates than the market. If in the observation period before the end of maturity the closing price of the underlying asset is above its set initial (Strike) price set at the beginning of the observation period, the Reverse Convertible is redeemed at its nominal value plus the coupon. If the closing share price is below its initial price, the investor is paid the nominal value in shares. The coupon is paid in cash. The number of shares to be delivered per nominal value is set according to the initial price. The remaining nominal value, which is below the value of 1 share, is paid in cash.

In case of Reverse Convertible with more than one underlying share, redemption is based on the share with the worst performance. If at the end of the observation period before maturity the price of this share is above its initial value, the bond is redeemed at its nominal value plus its coupon.

If at the end of maturity the price of the share with the worst performance is below its initial value, the investor again receives the nominal value redeemed in shares. The coupon is paid in cash. The number of shares to be delivered instead of the nominal value is set at the beginning of the period based on the initial price of the worst-performing share. The remaining nominal value, which is below the value of 1 share, is paid in cash.


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