What is a bond only in cash

Reverse Convertible Bonds: You should definitely consider this

Annette de los Santos, April 30th, 2021

Reverse convertible bonds are structured financial products. By definition, they belong to the Certificates and are not classic bonds. Reverse convertible bonds bear interest (coupon) and have a fixed, usually short term and a fixed interest payment date at the end of the term.

What are Reverse Convertible Bonds?

Comparable to Convertible bonds At the end of the term, there is the option of receiving shares in the respective company instead of repayment of the nominal amount. Unlike convertible bonds, the issuer of the reverse convertible is a Credit institution. In addition, the investor has no right to choose between repayment of the nominal amount and an exchange for shares. Rather, this decision is incumbent on the issuing bank and corresponds to the conditions specified when the bond was issued.

Usually one takes place Cash paymentif the price on the valuation date is equal to or above the strike price. If it is lower, the corresponding shares delivered. There are also reverse convertible bonds that are intended to be redeemed exclusively in cash from the outset.

Reverse Convertible Bonds are like stocks traded every trading day. The prices are indicative or non-binding (market making) by the issuer. Accrued accrued interest in the meantime must be paid with the purchase.

How Reverse Convertible Bonds Work

When issuing the reverse convertible bond, the interest rate and the term are determined Key data which are explained in more detail below:

Key data


Face value / face value
Value of a share of the reverse convertible, for example € 1,000.00.

Issue price
The price at which the reverse convertible bond can be subscribed within the subscription period. It is usually a little below face value.

A specific stock listed on the stock exchange.

Base price
Price determined by the issuer. It is based on the closing price of the share on the determination date, but is below this, usually by around 20%. The amount of repayment of the bond in cash or in shares of the company depends on whether the actual price of the share is above or below the base price.

Interest rate at which the reverse convertible bears interest at the end of the specified term.

Subscription ratio
Number of shares that, multiplied by the base price, results in the nominal value of a share bond, for example € 1,000.00 (see above). Or to put it another way: nominal value divided by base price. This number corresponds to the subscription ratio with which the repayment takes place at the end of the term.

Reference price
Closing price of the share on the valuation day.

Valuation day

On this day at the end of the term, the current price of the share is compared with the base price in order to determine the amount of the repayment. It is usually on the last trading day of the reverse convertible bond and about a week before it matures.

Is the current price of the underlying asset (share) at or over the base price, the investor gets the nominal amount of his bond repaid. This means that price increases above the base price benefit only the issuer.

If the current course is on the other hand under the base price, the investor will only receive the amount or the number of shares repaid that corresponds to the pre-determined subscription ratio. The repayment amount is therefore below the nominal amount. The yield resulting for the reverse convertible is below the guaranteed interest rate.

The The investor bears the valuation risk (Share price risk), but does not participate in any price increases above the base price.

Factors determining the market price during the term

In particular, the following factors can depreciating affect the reverse convertible bond:

  • the share price falls
  • the general level of interest rates rises
  • the expectation of future dividends is increasing
  • the volatility of the stock increases
  • the issuer's creditworthiness deteriorates

Conversely, these or individual factors can also be used adding value act or can cancel out positive and negative influences.

Example A: Reverse Convertible with Low Interest

The following are the market-determining factors based on two Examples explained.

Key data from Reverse Convertible A

Reverse convertible bond on Allianz SE, issued by HSBC Trinkaus & Burkhardt
Issue day 11.03.2016
last trading day 16.03.2017
Start of interest run 15.03.2016
Due date (valuation date) 17.03.2017
Payout 24.03.2017
Nominal amount 1.000 €
Base price 116 €
Closing price Frankfurt Stock Exchange (March 11, 2016) 144,32 €
coupon 3,6 %
number of stocks 8,621
Issue price 99,46 %
Repayment Cash settlement / physical
Investment amount 10.000 €
Invested capital 9.946 €
Maximum repayment 10.000 €

The return is positive

The Base price Example A is 80.38% of the closing price of the share at the end of the subscription period.

If the price of the base value Allianz SE is on the valuation date March 17, 2017 over or at the base price, the face value of € 10,000 is paid out. In addition, the investor receives 3.6% interest during the term of one year.

The return is negative

Is the price of the underlying asset under At the base price of € 116, for example € 110, the investor receives either 86 shares (plus cash difference) physically delivered or a cash repayment according to the subscription ratio. In this example, this cash repayment amounts to € 9,483 (based on the investment of € 10,000 nominal value). It is therefore € 463 below the invested amount of € 9,946.

Cash repayment: 8,621 × 110 € × 10 = 9.483 €

The investor receives interest of € 360, which is offset by a loss in value of € 463. The The return is consequently negative.

Shares instead of reverse convertible bonds

If the investor had instead invested in 86 Allianz shares on March 11, 2016, their acquisition costs (excluding trading fees) would have been € 12,411.52.

Acquisition cost: 86 × 114,32 € = 12.411,52 €

His sales proceeds (excluding stock exchange fees) on March 17, 2017 would have been € 9,460 (at a price of € 110), i.e. the loss would have been € 2,951.52. On the other hand, the dividend received in the meantime is to be expected.

The loss is therefore significantly higher than with the reverse convertible bond. If the investor didn't need the liquidity, they probably wouldn't have sold at that point. However, the reverse convertible bond investor can also keep the shares received for the time being and wait for the price to rise.

The investor would have benefited from a higher share price if it had exceeded the purchase price of € 144.32 (for example € 150.00). He would then have redeemed € 12,900. At a share price of, for example, € 129 on March 17, 2017, however, the sales proceeds would be € 11,094 and the loss on sale would be € 1,317.52, which is significantly higher than that of the reverse convertible bond.

Conclusion example A

In this example the interest rate is relatively low. This is also due to the fact that it is not necessarily to be expected that the Allianz SE price on March 17, 2017 will be below 116 €. The return would therefore correspond to the interest rate.

The current price of the share is reflected in the current price of the reverse convertible bond. In this example, the Allianz SE share price on July 28, 2016 fell from € 144.32 on the day of issue to € 127.75. The price of the reverse convertible has fallen to 98.29%, which is more than one percentage point below the issue price.

Example B: Reverse Convertible with High Yield

Will be on the market too Reverse convertible bonds with significantly higher interest rates offered as the following example shows.

Key data from Reverse Convertible B

Reverse convertible bond on Thyssen Krupp AG, issued by WGZ Bank
Issue day 08.04.2016
last trading day 23.06.2017
Start of interest run 12.04.2016
Due date (valuation date) 23.06.2017
Payout 30.06.2017
Nominal amount 1.000 €
Base price 14,50 €
Closing price Frankfurt Stock Exchange (April 8, 2016) 18,675 €
coupon 7,0 %
number of stocks 68,966
Issue price 99,32 %
Repayment Cash settlement
Investment amount 10.000 €
Invested capital 9.932 €
Maximum repayment 10.000 €

The return is positive

The Base price in example B is 77.64% of the closing price of the share on the day of issue.

In this example, the term - unlike in example A - is 14.5 months, so the interest rate of 7% corresponds to an interest rate of 5.79% p.a. The same conditions apply as in example A. The price of the reverse convertible on July 28, 2016 was 102.33%, i.e. 3 percentage points more than the issue price. This is based on an increase in the share price between the date of issue April 8, 2016 (€ 18.675) and July 28, 2016 (€ 20.34).

The interest rate, which is higher than in example A, is based on the bank's expectations of the future price development of the share, its volatility (key figure for the frequency and intensity of the expected price fluctuations) and seasonal influences. The higher the interest rate, the higher the credit and default risks, so that the return can be lower than with a lower nominal interest rate.

Effects of course changes

The following graph show the general functionality of reverse convertibles as well as the effect of price changes on the repayment amount.

As long as the interest rate is higher than the price loss of the shares, there is another one positive return. In the best case scenario, the investor achieves exactly the base price of his share plus the agreed interest.

What should you watch out for when investing in reverse convertibles?

Reverse convertibles seem a lot attractive for private investors because they promise significantly higher interest rates than “safe” bonds such as federal bonds. They also have one short term from one to one and a half years, so that the investment period is manageable.

It's on the running time to pay attention to the reverse convertible bond, as the stated interest rate always relates to the total term of the reverse convertible bond and not to a year.

The Price development of the reference paper, i.e. the respective share, has a significant influence on the price of the reverse convertible on the valuation date, as well as over the entire term. In the event of a positive price development during the year, the investor can sell the reverse convertible before maturity for an amount above the issue price or nominal value. He receives the interest on the sale proportionally as accrued interest. The potential investor should be able to realistically assess future market developments. The creation of a Best and worst case calculation makes sense.

In contrast to the stock, the investor receives no dividend.

Because of the existing Exchange rate risks of the underlying, the potential investor should not only focus on the interest rate offered, but should also study the underlying share in detail in order to better assess its price opportunities and risks.

The investor is exposed to the issuer or credit risk, i.e. the Risk of total loss of the capital employed (possibly even the interest) if the issuing bank gets into over-indebtedness or insolvency.

Protect Reverse Convertible Bonds

Protect reverse convertible bonds are a further development of the classic reverse convertible bonds. The decisive factor here is whether a certain value is exceeded or not reached barrier for example 80% of the stock exchange price of the share on the determination date.

The Base price is defined differently in this case: It corresponds to the closing price of the share on the day of issue. The subscription ratio of the shares is determined on the basis of this base price (100%). The barrier is usually 80% of it. The strike price × 0.8 gives the barrier, which is shown as the price.

Barrier = base price × 0.8

Note subscription ratio

The barrier appears to the investor as Safety buffer. However, the subscription ratio is lower than with the classic reverse convertible bond, i.e. the investor receives fewer shares if the barrier is undershot than with the classic reverse convertible bond. This is because the subscription ratio for the Protect Reverse Convertible is determined based on the market price.

In the case of the classic reverse convertible, the base price is significantly lower (also mostly at 80%). The subscription ratio of the shares is determined on the basis of this lower base price and - based on the nominal value - results in more shares than in the case of the Protect bond, which is lower for the investor if the barrier (Protect bond) or the base price (for the classic reverse convertible bond) is not reached Repayment amount leads.

In the case of the Protect Reverse Convertible, only the issuing bank participates in additional opportunities if the price is above the barrier.

As the above examples show, the base price there was also 77% to 80% of the share price on the day of issue. that means there is also a safety buffer of 20% to 23%. This consequently results for the investor no advantage from the “Protect Reverse Convertible” versus the classic Reverse Convertible - on the contrary.

The following example (without taking interest into account) is intended to illustrate this.

Example 1: Reverse Convertible

  • Face value of the portion of the bond: € 1,000
  • Stock market price Allianz at issue: € 127
  • Base price (80% of the stock exchange price): € 101.60

Face value


Base price

= Subscription ratio

1.000 €


101,60 €


At a price (reference price) of the share at maturity of € 100.00, the investor receives 100 × 9.84 shares or € 984.00.

Example 2: Protect Reverse Convertible

  • Face value: 1.000 €
  • Stock market price Allianz on issue (here called base price): € 127

1.000 €


127 €


At a price (reference price) of the share at maturity of € 100.00, the investor receives 100 × 7.874 shares or € 787.40.

That is significantly less than with the classic reverse convertible bond.

Index bonds

Index bonds are a category within reverse convertible bonds. Instead of the development of a specific share, they aim at the development of a stock index (e.g. DAX). In the event of physical repayment, this is done in the form of a specific index certificate.

Reverse Convertible Costs

If the investor acquires the reverse convertible bond through subscription, none will arise Exchange fees. In the event of a later purchase, the usual bank trading fees apply.

Further costs are not recognizable for the investor. On the contrary, it has the advantage that the issue price is usually below 100%, as the examples above show.

However, the investor still bears the Issuing, selling and administrative costs the issuing bank. These are reflected in the issue price and can be found in the bond terms and conditions.

Alternatives to Reverse Convertible Bonds

The fact that investors can invest money through diversification, i.e. investing in several reverse convertible bonds, has a positive effect. He can structure his portfolio in such a way that, on the one hand, he buys reverse convertible bonds on stocks with lower price risks or lower volatility with lower interest rates. On the other hand, he can purchase reverse convertible bonds on stocks with higher price fluctuations and correspondingly higher interest rates.

Fixed-income bonds are an alternative form of investment in order to avoid share price risks and consequently low or even negative returns. These include, for example Corporate bonds. This is where the issuing company's credit risk arises. Corporate bonds have a longer fixed term, usually several years. The market price of corporate bonds also changes when the share price of the issuing company fluctuates. With falling prices, sales during the term are possible, but not attractive.

An alternative with high returns is crowd investing with BERGFÜRST. Via the platform, investors invest in real estate projects with 5.0 to 7.0% p.a. earn interest. Once the investment amount has been reached, no more subscriptions are possible.The invested amounts can be bought or sold like bonds via the platform for real estate crowdinvesting at the current price.

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