The appeal of reverse convertibles lies in their comparatively high interest rates. And so reverse convertibles are an interesting investment alternative for many investors, especially in the current environment. But why can reverse convertibles actually pay a higher interest rate?
The interest rate
The reason for this: The level of the interest rate is primarily dependent on the range of fluctuation (volatility) of the underlying asset and the term of the reverse convertible. The higher the volatility of the underlying for the same term of the reverse convertible, the higher the interest rate and vice versa. In contrast to the repayment of capital, interest is paid regardless of the price of the underlying asset. Thus, the interest is paid out in any case, for the time between the purchase and the repayment or sale of the reverse convertible. The interest income, in turn, is calculated from the respective nominal amount of the reverse convertible. This means that if the reverse convertible pays 8 percent pa with a term of one year, the interest income is 80 euros (1,000 euros nominal amount x 8 percent / 100). The owner of the reverse convertible is entitled to the pro rata interest amount for each day (accrued interest day) that he is in possession of the reverse convertible. It is paid when the reverse convertible is sold before the actual interest payment date. In this context one speaks of so-called accrued interest. Without the accrued interest regulation, selling the reverse convertible before the interest date would deprive its owner of the interest income. On the interest date, the holder of the reverse convertible receives the full interest amount, regardless of when the reverse convertible was purchased.