Variations on reverse convertible bonds are holding investor interest in one of the most popular retail structured products of last year, officials said last week at the Structured Products Association conference in New York. With rising interest rates and increasing volatility, the most significant interest from investors is for knock-in protection, said John Tessar, product manager at LaSalle Bank.
Reverse convertibles are the opposite of convertible bonds. The very short-term, high-yielding notes are tied to a single underlying stock and return a coupon if the stock closes at or above an initial strike price and shares if it closes below the initial price. Knock-in features allow the investor to receive the coupon even if the stock closes below the strike price as long as it never touches or falls below a knock-in price. If it touches the knock in, the feature disappears and returns stock like an unprotected reverse convert.
Tessar said reverse convertibles are now dwarfing principal protected notes. Kevin Mahon, senior v.p. at Countrywide, said he saw volume double last year. "Everyone wants to be in this market."
