The reverse convertible bond sparks a lively debate


A debate has emerged online (based on this article in The Wall Street Journal) about the financial the instrument known as a reverse convertible bond. A regular convertible bond pays the owner interest, and gives him an option to swap his debt for a pre-determined number of shares in the company. A reverse convertible also pays the owner interest, but means he may be given stock instead of principal if shares in the company fall by a certain amount.

Felix Salmon of Reuters started things off by calling the product a "scam" that should be outlawed. But on Seeking Alpha, Vincent Fernando disagreed -- essentially saying that personal responsibility needs to be allowed to take its course, and individual investors are best suited to make their investment decisions based on the various choices available to them. And, as Fernando rightly notes, a reverse convertible position can't lose anything beyond what one would lose simply owning the stock.