What is a reverse convertible?
Reverse convertible bond is a bond that gives the issuer the right to change the holder of the bond holder to a debt or his own capital of a basic company. This company is usually not the same as a bond company. These bonds are generally held on a short -term horizon and promise the investor's high return for paid principal. Such high returns are necessary to compensate the investor for the risk that the price of shares that is the basis of a reverse convertible could fall to a point where, if the bond is transferred, the investor would receive less than the original principal paid.
Most bonds are issued by institutions to investors who pay the initial payment of principal for the right to regular interest payments and any reimbursement of the principal. There is a type of binding known as a bond convertible that combines elements of market derivatives with typical aspects of Bond. With a convertible bond, the investor has the right to change the bond to his own capital debt at the end of the bond term, also known as DAtum maturity. On the other hand, a reverse convertible bond provides transfer rights to the issuer.
in a typical reverse convertible, the investor makes the initial main payment and holds bonds after relatively short -term, often only a few years or even less. The coupon rate, a percentage of interest from the principal to be returned to the investor in regular installments, is significantly higher than the rates associated with common bonds. This is because the investor accepts the risk associated with the potential decrease in the price of the underlying shares.
It is typical for the reverse converter to have a direct relation to the company underlying shares. Basically, the bond issuer has something called the option for this contract. This means that if the basic price of shares is the expiration of the bond validity of the bond, the bond director may be transferred to the shares of the underlying shares. If this happens, it saysthat the possibility was "inside", which means that the possibility can be applied.
Whenever a reverse convertible bond gets into it, the investment of bond holder can suffer as a result. The debt or own capital it receives will often be significantly lower than the amount of principal paid for the bond. As a result, investors must always take root into this type of bond to either rise or at least remain above the Knock-in level.