Reverse Convertibles
A security that is linked to a share (underlying share) offers a very
attractive interest rate, the coupons greatly exceed the market interest rate.
Reverse Convertibles
A Reverse Convertible is a security linked to an underlying share, offers a highly attractive interest rate and the coupons significantly exceed the market interest rate. Due to the high coupon value, the investor bears the appropriate risk which results from linking it to the underlying share. At maturity the payout of the Reverse Convertible is determined precisely on the basis of its price. If at the end of the maturity period, the share price is higher than its initial value, the coupon and nominal value is paid out. If at the end of the maturity period, the share price is lower than its initial value, the coupon is also paid out, but the nominal value is paid out in shares (physical delivery). The number of shares is determined according to the initial share price. The remaining nominal value, which is less than the value of 1 share, is paid out in monies. Apart from Reverse Convertibles with one underlying asset, there are also Reverse Convertibles with more shares as underlying assets. Usually higher coupons are paid in these structured notes with more underlying shares. The method of payment is determined here according to the share that has performed the worst in the observed period. The coupon is again paid out regardless of the development of the underlying assets.
Investors who do not expect any significant movements of shares may, when investing in Reverse Convertibles, receive a high fixed coupon. The maximum yield of a Reverse Convertible is limited to the coupon value. This form of investment is very interesting within the environment of stock markets in which further stronger growth is not expected.
Your advantages
- You will gain a high fixed coupon that exceeds the market interest rate.
- Reverse Convertibles usually have a short maturity period.
- The fixed coupon offers you a reserve to cover risks.
You should know
- You may incur losses if the shares are paid out at maturity.
- The potential yield is limited by the coupon amount.
- Reverse Convertibles are not covered by any deposit insurance system. The investor is exposed to the risk that Erste Group Bank AG will not be able to meet its obligations that arise from Reverse Convertibles in the event of insolvency, over-indebtedness or intervention by the regulator (remedial regime). There may be a complete loss of invested capital.
- The price for the procured sale of senior bonds, structured bonds and structured notes, subordinated and other bonds is expressed in percentages of the trade volume. You can find details in the Price List.
What else should you know about Reverse Convertibles
Reverse Convertibles are issued with a fixed coupon determined at the start. If at the closing observation before maturity, the closing price of the underlying asset is higher than its determined initial price (Strike) determined at the start of the observation period, the nominal value of the Reversible Convertible plus the coupon is paid out. If the closing share price is lower than its initial price then the investor is paid the nominal value in shares. The number of shares that will be delivered instead of the nominal value is determined according to the initial share price (strike). The remaining nominal value, which is less than the value of 1 share, is paid out in monies. The coupon is always paid out in monies.
In case of a Reverse Convertible with more than one underlying share, the basis for the method of payment is the share which performs the worst. If, at the closing observation before maturity, the price of this share is higher than its initial value, the nominal value of the bond plus its coupon is paid out.
If, at the end of the maturity period, the price of the share with the worst performance is lower than its initial value, the investor will again receive the nominal value paid out in shares. The number of shares that will be delivered, instead of the nominal value, is determined at the start according to the initial price of the worst share. The remaining nominal value, which is less than the value of 1 share, is paid out in monies. The coupon is always paid out in monies.
Income from the holding and selling of foreign bonds and structured notes (ISIN does not start with CZ) is not subject to final withholding tax, but is subject to individual taxation, and if not exempt from tax, the taxpayer is obliged to declare this income in the relevant section of a tax return.
… increasing markets?
If the price of the underlying share increases, the bond price also increases because the repayment of the nominal value becomes more likely.
… stable markets?
On stable markets the investor profits from the fixed coupon and from the payment of the nominal value at maturity. The stable price has a very small effect on the value of the Reverse Convertible, but this value increases by how the period to maturity gets shorter.
… falling markets?
If the price of the underlying share falls against its initial value (Strike), the price of the Reverse Convertible also falls because the payment of the nominal value in shares becomes more likely. In each case the fixed coupon will be paid out.
Chart: profit/loss
Bonds are offered in the form of a global note - Česká spořitelna purchases and sells bonds by transfer of notes in the register of shareholders. The transfer is settled within 2 business days after ordering a trade. If an investor pays the price of the purchased bond, a share in a global note is credited to the investor’s asset account within 2 business days after ordering the purchase.
Terms of purchase and sale of bonds and structured notes
Taxation of investment yields
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