What Is a Reverse Convertible Bond?

Reverse Convertible Bond is referred to as trans-convertible bond or reverse convertible bond.

Trans convertible bonds

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Reverse Convertible Bond is referred to as trans-convertible bond or reverse convertible bond.

A trans-convertible bond is a bond that gives its issuer the right to convert it into the stock of the underlying company within a certain period of time and under certain conditions, usually with a higher coupon rate and a shorter maturity. In essence, trans-convertible bonds can be viewed as an issuer holding a put option on the underlying company's stock while issuing the bond, allowing the issuer to convert the bond into a certain number of underlying bonds under certain conditions. Company share.

The difference between trans convertible bonds and convertible bonds is that trans convertible bonds give the issuer a put option on the company's stock, while convertible bonds give investors a call option on the company's stock.

Trans convertible bonds are akin to

Trans convertible bonds have the characteristics of being an option to the issuer and a bond to the holder. They also have the characteristics of bonds and stocks.

It has the following characteristics:

(1) Trans-convertible bonds usually require a higher coupon rate than other general corporate bonds, and annual profits can reach about 15% -20%. This higher annual profit is a necessary risk compensation for investors facing greater risks, because once the price of the underlying stock drops to a certain point, the bond is converted into stock, causing the original capital Reduce, investors suffer losses.

(2) The maturity of trans-convertible bonds is much shorter than that of ordinary bonds, usually only 1-2 years or even shorter. A shorter investment period can reduce investor risk to a certain extent, otherwise the potential price of the underlying stock is more likely to fall, and the risk of capital loss is greater.

(3) Trans convertible bonds cannot guarantee full recovery of the investment principal at maturity. Because when the price of the underlying stock drops to or below the option-locked level specified in the contract, once the bond is converted into stock by the issuer, the value of the stock received by the investor is lower than the initial investment capital.