OMG...a product question

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Sep 13, 2006 2:30 pm

Among all the BSers in here, a few of us actually are stockbrokers/planners/whatever, and have been for more than six months...so this question is for you (no offese to the newbs).


So are any of you all using reverse convertibles?  I've been looking at them pretty closely, and with the short maturities and attractive coupons, they seem like a good fit for some folks (as long as you like the common of course).


Any thoughts on these?

Sep 14, 2006 10:43 am

Since you and I seem to be the only ones so far who actually want to use this forum as something other than a mental distraction from actually working, I will try to answer your question.


I have only used reverse convertibles a few times to a select group of investors. I think that they are interesting.  I have quite a few I can offer at this time.  Some are tied to CAT with a 20% downside and a 8.5% coupon and some to MSO  with a 30% downside and a 10% coupon and so on.  They appeal to the more aggressive investors who might not object to ending up with the underlying stock instead of the actual return on the bond and take the chance that they will not get their full principle back. 


I would completely avoid them with those investors who can't get beyond the CD mentality and look at the coupon rate, when it may be very likely that they will end up with a stock that they would rather not own.



Here is a little snippet from the web to explain what a reverse convertible is.


Reverse convertibles are bonds which carry a fixed rate of interest but do not guarantee the full redemption of the original investment on maturity. Indeed, if the price of the financial asset underlying the reverse convertible is lower than a given price fixed when the bonds are issued (the "strike price"), investors will receive a predetermined number of shares in place of the principal amount they subscribed for. In the case of reverse convertibles with a "knock-in" clause, both the following conditions must be fulfilled if the bonds are to be redeemed on maturity in shares instead of in cash:



the price of the shares underlying the reverse convertible bonds must be lower on maturity than the strike price
the price of the underlying shares must have been equal to or less than a given percentage of the strike price at least once during the life of the bonds
Sep 14, 2006 11:06 am
BankFC:

Among all the BSers in here, a few of us actually are stockbrokers/planners/whatever, and have been for more than six months...so this question is for you (no offese to the newbs).


So are any of you all using reverse convertibles?  I've been looking at them pretty closely, and with the short maturities and attractive coupons, they seem like a good fit for some folks (as long as you like the common of course).


Any thoughts on these?



No. I use variable annuities and private deals.

Sep 14, 2006 11:30 am
babbling looney:

Since you and I seem to be the only ones so far who actually want to use this forum as something other than a mental distraction from actually working, I will try to answer your question.


I have only used reverse convertibles a few times to a select group of investors. I think that they are interesting.  I have quite a few I can offer at this time.  Some are tied to CAT with a 20% downside and a 8.5% coupon and some to MSO  with a 30% downside and a 10% coupon and so on.  They appeal to the more aggressive investors who might not object to ending up with the underlying stock instead of the actual return on the bond and take the chance that they will not get their full principle back. 


I would completely avoid them with those investors who can't get beyond the CD mentality and look at the coupon rate, when it may be very likely that they will end up with a stock that they would rather not own.



Here is a little snippet from the web to explain what a reverse convertible is.


Reverse convertibles are bonds which carry a fixed rate of interest but do not guarantee the full redemption of the original investment on maturity. Indeed, if the price of the financial asset underlying the reverse convertible is lower than a given price fixed when the bonds are issued (the "strike price"), investors will receive a predetermined number of shares in place of the principal amount they subscribed for. In the case of reverse convertibles with a "knock-in" clause, both the following conditions must be fulfilled if the bonds are to be redeemed on maturity in shares instead of in cash:



the price of the shares underlying the reverse convertible bonds must be lower on maturity than the strike price
the price of the underlying shares must have been equal to or less than a given percentage of the strike price at least once during the life of the bonds

I think they are interesting as well.  One in particular I saw was 10.2% coupon on EBAY with 35% downside protection.


EBAY is a lot lower than it has been the past 52 weeks, and still looks good (5 star Morningstar stock).


Just thought I'd throw that out.

Sep 14, 2006 11:08 pm

I used a few of them in the past and honestly had a very bad experience.

I honestly think they're too complicated to value accurately for anyone other than a full-time desk trader with a Masters or PhD in Finance.  This places your typical(and even above-average) retail financial advisor in a seriously disadvantaged position when considering whether to buy or sell.

If it seems too good to be true, it probably is.