Reverse convertibles

Reverse convertibles are securitized derivatives. They are linked to the price performance of a share and also have a coupon that guarantees interest payments and is usually well above the level of capital market interest rates. On maturity at the end of the term, the issuer has the option of repaying the nominal amount or delivering a precisely defined number of shares in the underlying security. If the share price on the valuation date is below the strike price, repayment is usually made in shares. Sharp falls in the share price can overcompensate for the interest payments, meaning that losses can also be incurred.