Reverse Convertible Bond - RCB

A bond that can be converted to cash, debt or equity at the discretion of the issuer at a set date. The bond contains an embedded derivative that allows the issuer to put the bond to bondholders at a set date prior to the bond's maturity for existing debt or shares of an underlying company. The underlying company need not be related in any way to the issuer's business. These types of bonds usually have shorter terms to maturity and higher yields than most other bonds because of the risk involved for investors, who may be forced to redeem their bonds for securities in a company that have, or are expected to, decrease substantially in value.

Reverse convertible bonds are popular with European-based issuers. An example of a reverse convertible bond is a bond that has a period to maturity of two years and allows the bond's issuer - say, a European bank - to redeem the bond at its discretion in shares of a given blue chip by the maturity date. These bonds have high yields of around 15-20%.