Reverse convertible securities

A reverse convertible security is a type of convertible security where a bond or short-term note can be converted to cash, debt or equity at a set date by the issuer based on an underlying stock. In effect it is a type of option on the maturity date where the bond can be converted to shares or cash. For the investor they get the advantage of a steady stream of income due to the payment of a high coupon rate, but will either get back their principle or a predetermined number of shares in the underlying stock if they are lower. The coupon rate is typically higher because the investor participates in the risk that the underlying shares are lower at the maturity date.

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