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Reverse Convertible Bond

Reverse Convertible Bond Definition

Reverse Convertible Bond – RCB refers to a type of bond that can be converted by the issuer into cash, debt or equity at a given date prior to the bond's maturity. The bond includes a derivative allowing the issuer to put the bond to bondholders for debt or shares of an underlying company.  The value of the bond is derived from the underlying shares. If the price of the underlying stock would fall below a specified level, the issuer exercises the option and converts the bond into shares. Investors demand a higher interest rate for this type of bond, as coupon payments may be ended and  they have to redeem their bonds for low-value securities.

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