Reverse convertibles are linked to the performance of a share. Through this coupling, it is possible to achieve a coupon, which is higher than the market rate. In return for the interesting coupon, the investor bears the equity risk, because at the end of the term, the price of the underlying is decisive for the redemption of the reverse convertible bond. If at the end of the term the price of the share exceeds its strike price, the coupon and the nominal amount are repaid. If at the end of the term the share price is below the strike price, then the initially fixed number of shares per nominal amount will be delivered in addition to the coupon.
Protect reverse convertibles are also linked to the performance of a share. In addition to the strike price, protect reverse convertibles also have a barrier (= protect). This additional protection against moderately falling prices means that the coupon is slightly lower than that of traditional reverse convertible bonds. If at the end of the term the price of the share exceeds its strike price, the coupon and the nominal amount are repaid. If the share price is below the strike price at the end of the term, the barrier offers an additional risk buffer (= protect). If the barrier has not been touched or broken during the term, 100% of the invested capital and the coupon will be paid. However, if the barrier has been touched or broken, a physical delivery of the shares or cash settlement will occur depending on the structure of the protect reverse convertible. The coupon will be paid in any case.
In addition to reverse convertibles with single underlyings, there are also reverse convertible bonds, which have several underlyings. In most cases, multi protect reverse convertibles pay a higher fixed coupon due to the increased equity risk. For this type of bond, the redeemable share is the one with the weakest performance at the end of the term. Regardless of the nature of the repayment, a fixed coupon is also payable here.