The **Barrier Reverse convertible** is one of the simplest and oldest form of a yield enhancement structured product.

## Example of Barrier Reverse Convertible

An example of such a product is defined by the following elements:

- Issuer : Bank ABC
- Maturity : 18 months
- Underlying : Microsoft Corp (MSFT)
- Currency : USD
- Denomination : 100,000
- Coupon rate : 4% per annum
- Coupon Frequency : quarterly
- Barrier Type : Continuous
- Barrier Level : 65%

To make the description of the payoff easier, let’s note S(t) the price of the underlying S at time t.

S(0) will then ben the price the underlying at time 0.

S(T) will be the price of the underlying at maturity.

The payout of such a product will be (and subject to the issuing bank ABC not defaulting) :

**During the life of the product**

The coupon of 4% per annum will be paid on a quarterly basis (1.00% per quarter). That coupon is guaranteed in the sense that it is paid irrespective of the performance of the underlying security (here Microsoft)**At maturity**,- If the underlying has never traded below the barrier during the the life of the product, the redemption of the note will be 100%
- If the underlying has traded below the barrier at some time during the the life of the product, the redemption of the note will be
- 100% if S(T) is greater or equal to S(0)
- S(T)/S(0) if S(T) is strictly less than S(0)

**For the investor, buying a reverse convertible is equivalent to**

- Being long a zero-coupon bond issued by the issuing bank
- Receiving regular guaranteed coupons from that issuing bank
- Being short an at-the-money put option , with continuous Knock-In on the underlying security

**The barrier can have different types, depending on how it is observed **:

**Continuous or American**: The barrier is observed continuously and any intraday tick is observed**Final or European**: the barrier is only observed once at the maturity of the product**Daily on close**: This variation is very similar to the continuous observation but only the closing prices of the security are considered