A reverse convertible is a short-term investment linked to an underlying stock. These securities offer individual investors a predictable, steady stream of income due to the payment of a high coupon. At maturity, the investor will receive either 100% of their original investment amount or a predetermined number of shares of the underlying stock, in addition to the stated coupon payment. If shares of stock are delivered to the investor, their value will be less than the original investment amount. It is important to note that the investors earning potential is limited to the security’s stated coupon.

Important Features

Short-Term Investment
Reverse convertibles are typically issued with maturities that range from six months to two years.

High Coupon
They are typically issued with above convertible is a short-term investment linked to an underlying stock. These securities offer individual investors a predictable, steady stream of income due to the payment of a high coupon. At maturity, the investor will receive either 100% of their original investment amount or a predetermined number of shares of the underlying stock, in addition to the stated coupon payment. If shares of stock are delivered to the investor, their value will be less than the original investment amount. It is important to note that the investors earning potential is limited to the security’s stated market rate coupons that could range from 8% to 15% per annum.

Predictable Income
The coupon is paid regardless of whether the investor receives cash or shares of stock at maturity.

Not Principal Protected
At maturity, investors may receive securities worth less than their original investment amount.

Low Minimum Investment
Some, but not all, reverse convertibles can be purchased for a minimum investment of $1,000 and in increments of $1,000 thereafter.

Liquidity
Most issuers of reverse convertibles intend to maintain a secondary market in notes they have issued, although they are not obligated to do so. If the investor sells their security prior to maturity, it may be worth less or more than the original amount invested.

Investment Risks and Considerations

Suitability
Reverse convertibles may not be suitable for all investors due to the potential for loss of principal.

Reverse convertibles consist of a debt instrument and a put option. By purchasing a reverse convertible, the investor sells the issuer the right to deliver the underlying asset to the investor at some point in the future. At maturity, the investor could receive either cash or shares of stock. Reverse convertible investors should have the knowledge and experience in financial matters necessary to be capable of evaluating the risks of such a transaction, and be financially able to bear the risk of a loss Principal.

In addition, because there can be no assurance that a secondary market will develop or be maintained, they are most suitable for investors who intend to purchase and hold them until maturity.

Principal Risk
Reverse convertibles are not principal protected, thus there is no guaranteed return of principal. If the price of the underlying asset decreases, the investor may receive shares, whose value will be less than the original amount invested. However, an increase in the value of the underlying asset will not increase the return on the reverse convertible.

Credit Risk
The creditworthiness of the issuer is an important consideration when evaluating any debt instrument. A purchaser of a reverse convertible must rely upon the issuer’s ability to meet its obligations to make payments of principal and interest. However, it should be noted that because reverse convertibles are not principal protected, the credit quality of the issuer on its own is not a sufficient measure of the safety of the principal invested.

Secondary Market Risk
There is no guarantee that a secondary market will be available to investors who need to sell their securities. If an investor needs to sell a reverse convertible prior to maturity in the secondary market, it will be subject to many unpredictable factors including prevailing market conditions and may be worth less or more than its original cost.

Taxes
Because reverse convertibles consist of two components, a debt instrument and an option, they are subject to special tax treatment. Investors should read the relevant section of the prospectus or offering circular carefully and should consult their tax advisor prior to any purchase.

Issuer Call
Some reverse convertibles may be issued with a call.