The reverse convertible bond is a fixed-interest security that many investors use as part of an investment. The investment in fixed-income securities bonds is also known as the equity issue loan or the reverse convertible bond. With the acquisition of the bond, the buyer and owner receives above all two rights. On the one hand, he is entitled to an annual interest payment, which is usually made to a separate account, for example the current account. On the other hand, the owner also has a right to get back his capital. At this point, however, there is a peculiarity that is characteristic of the reverse convertible bond. While the investor has the right to get back the nominal amount invested on almost all other bonds when the bond matures, this is not necessarily the case with the reverse convertible bond.
The main feature of the reverse convertible bond is that the issuer can choose whether to repay the nominal amount at maturity or to repay the investor’s capital in shares. If, for example, an investor has acquired a reverse convertible bond for a nominal amount of € 20,000, the issuer of the bond has the option at the end of the term whether to repay the € 20,000 or alternatively to deliver a certain number of shares. Both the number of shares and the shares are defined from the outset. Specifically, this means: In the example, the customer buys a stock loan for 20,000 euros. For example, under the terms and conditions of the issue, it could be stipulated that the issuer may deliver 200 shares to the holder of the bond when due instead of repaying this 20,000 euros.
Of course, the issuer will only decide to deliver the shares if the share price of the individual share is less than EUR 100 in the case of a reverse convertible bond. For example, if the stock has a price of $ 90, 200 would only have a total value of $ 18,000, which the issuer would have to pay instead of the nominal amount of $ 20,000. For the holder of the reverse convertible, this would mean a loss of 2,000 euros. Due to this increased risk, another feature of the reverse convertible bond is that the interest rate during the term significantly exceeds the interest rate of comparable bonds.