Reverse convertible bond terms are typically short, ranging from a few months to several years.
The bond contains a put option which allows the borrower (the bond issuer) to pay out the underlying assets instead of paying out the face value in cash when the bond matures – if the value of underlying assets falls below a certain threshold.
Reverse convertible bonds generally deliver higher yields than regular bonds because the borrower bears much less risk. If the value of stocks plummets, the borrower can simply repay the investor in the form of worthless stocks instead of hard cash at the end of the bond term.
See also: Convertible bond