The Reverse Convertible

Feb 6, 2022 | Products

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

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 : 5% per annum
  • Coupon Frequency : quarterly

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 5% per annum will be paid on a quarterly basis (1.25% 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, 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)

Graphically, here is the redemption of the redemption at maturity, ignoring intermediary guaranteed coupons

Once can recognize the payout of a short put position, indeed 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 on the underlying security
Eric Barthe

Eric Barthe

Founder of

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