Reverse convertible securities

In a reverse convertible (also share tender bond, Eng. Reverse convertible bond or equity linked bond) is a structured finance product. Its most important feature is that the issuer at the end of the term shall have the right either to repay the principal amount to 100 % or to supply a certain number of ( pre-determined ) shares. In addition, the investor receives one or more coupon payments during the term. The coupon rate is significantly higher than for a conventional bond in the rule.

If the underlying is shares, it is called an equity loan. If the repayment depends on the performance of an index (eg, the DAX), there is a bond index.

Convertibles are from the perspective of the issuer instruments to raise capital and at the same time for hedging, the investor they are investments with high interest rate and with a high risk of loss.

Construction and operation of a share loan

With a share bond, the investor buys a fixed income security that is registered to a specified notional amount. The purchase price is based on " number of purchased bonds × notional amount × current price of the bond as a percentage ." In addition, the buyer will be charged the possibly since the date of issue or the last interest payment date accrued accrued interest on the purchase. How " normal" bonds are convertible bonds with a coupon, the coupon rate is, however, generally well above their level.

The special thing about these products is that the issuer at maturity, shall have the right to choose either to repay the principal amount or the investor a predetermined number (also called " reference amount" or "Ratio " ) is to be used of certain shares. The type of repayment is determined by the price of the underlying security on the valuation date ( just before the end of the term ) - also known as compared to the agreed strike price, also the "Exercise Price ", " acceptance threshold " or " Strike ": If the share price is below the fixed strike price, the issuer is regularly are shares, in the opposite case, payment of the nominal amount.

Example: The buyer of the bond acquires shares for € 1,000 on 31 December 2000 by the issuer ( bank) one shares bond with the shares of Allianz AG ( WKN 840400 ) as Underlying. There is a per annum coupon rate of 12 % paid, the investor shall in any case. The issuer reserves the right to repayment on 31 December 2002 either by payment of the nominal amount to make ( = € 1,000 ) or to serve 11 shares of Allianz AG. From the second alternative, the issuer will only make use if the share price at the balance sheet date is lower than the strike price, in this case € 90.91 ( = 1000 /11). Otherwise, it wipes out the nominal amount.

With a share bond, the investor invests in a certificate and is in fact the " writer " (or " Seller") a put option ( = put). The Bank as issuer of the bond determines the purchase price paid to interest and acquires the right to exercise the put option (on the underlying shares) on the due date at the agreed strike price ( = strike price). The difference between the market rate and the (higher ) rate of the reverse convertible is thus practically an option premium for the writer.

Constellations at maturity

The base price of the stock and bond the share price on the valuation date determined at maturity the form of repayment:

• If the price of the stock below the strike price, the bond issuer ( = buyer of the put option ) will exercise the option and the fixed number of shares is the writer of the put (ie the purchaser of the shares bond) is used, ie booked into his securities account. Since only whole pieces can be delivered, is the bondholders in the event of any ratio - a so-called decimal places rata when due "Cash Settlement " (also called " cash settlement" called ) paid.
• If the price of the stock at or above the strike price, the issuer of the bond will not exercise the put option, the purchaser of the Shares Bond gets back the principal amount of the bond.
• The interest rate, including the option premium contained therein, the buyer receives the shares bond in both cases.
• The bond can be sold before maturity and the then current bond price, which the seller the accrued interest for the period will be credited to sales.

On issue of equity bond, the issuing bank chooses the strike price often close to the current price of the underlying share, so the stock bond is listed at 100 %. During the term, their price is based primarily on the price of the underlying stock, its course and volatility: stock prices below the strike price reflect their motion is approximately proportional in the price of the bond, with possible significant losses. In contrast, the bond to the share price above the base price rates over 100 % is reached only by the ( compared to the general level of interest rates ) higher returns and the value closer to the due date 100 %.

Calculation of success

From a yield standpoint, there is the success for the investor from the following, with plus ( ) or minus (-) marked components:

Other forms of reverse

In addition to the standard form occur in the market to other types of convertibles. To this end, the following descriptions are indicative only, which may be defined in specific cases of the issuer otherwise:

• Index Bond: The principle is the same as a stock loan. If the price of the underlying index is below the strike, the repayment is usually done by ' cash ', with some exceptionally emissions by an index paper.
• Reverse Convertible / Reverse Convertible Protect: This is in addition to the base price is a ' barrier course' agreed determines its sub - or non - underflow during the term of the repayment of the form of the reverse convertible at maturity: nominal shares or, in some cases regardless of the then current share price.
• Multi- Reverse Convertible: ' Underlying ' are several stocks - with varying strike price. The reimbursement form is based eg on the stock with the ' worst ' performance.
• Protect Multi- Reverse Convertible: Here, too, several stocks on the underlying securities. In addition, thresholds are defined, which exceeded or ( in any or all shares) in the form of repayment determined.

Tax Treatment

Reverse convertibles are no longer disadvantaged in Germany since the introduction of the flat tax in relation to the similar in structure constructed discount certificates.

For acquired after 2008 convertibles following rules apply ( for old stocks are subject to special rules ):

• Purchase of the bond: Possibly. accrued interest paid is tax- relevant, that is, the earned thereon, withholding tax is paid or offset against future tax amounts.
• Sale prior to maturity: Sale Success = success rate (the difference between the share price at bond purchase and sale ) interest /. . accrued interest. / paid. fees paid. Income is taxable, loss is offset against any capital gains taxable income.
• Maturity ( with nominal repayment): Interest and any gains are capital gains taxed; ( / fees.. ) Losses with all settlements taxable income netted.
• Maturity ( with equity put options ): Interest and any applicable Cash settlements are taxable capital gains. (. . / Fees) (. . / Selling fees) The purchase price of the bond is deemed acquisition price of the shares actually received (excluding cash settlement ), from which only at the later sale of the tax-related success stems: Then gains are taxable, losses are only be offset against profits from stock transactions. For this avoidance strategy: sell short bond before maturity.

Risks compared to the investment in the underlying

In a trade-off between investing directly in the underlying (in a reverse convertible so directly in the stock ) and the stock loan risk following structure applies:

When should you buy a stock loan?

The risk of a stock loan is only apparently less than with a direct investment in the Underlying. The investor, however, limited participation losses almost entirely on profits because the income upward " capped " is. It is therefore advisable to purchase these products only in anticipation of moderately increasing or constant prices. However, the much higher rate of interest (coupon ) is a risk buffer for losses from a negative share price performance, which is why convertibles are also often compared to discount certificates.

Because gains and losses primarily result from the performance of the Underlying, a thorough information gathering regarding the Underlying is enormously important.