Knock-in Reverse Exchangeable Securities
Knock-in Reverse Exchangeable Securities combine certain features
of debt and equity by offering fixed coupon payments during the
term of the securities while basing the payment or delivery at
maturity on the price performance of an underlying stock.
The fixed coupon payments typically are higher than the yield
payable on a conventional debt security with a comparable issuer,
maturity and credit rating. A higher fixed coupon rate is possible
because the investor indirectly sells a put option to the issuer
on the underlying stock.
The put option gives the issuer the right to deliver stock to
the investor at maturity rather than make a cash payment depending
upon the closing price of the underlying stock on a specified
determination date. This is why we call these securities "exchangeable"
. The securities are "knock-in" exchangeable because
the exchangeability occurs only if the market price of the underlying
stock falls to or below a predetermined "knock-in level"
Unlike ordinary debt securities, Knock-in Reverse Exchangeable
Securities do not guarantee the return of principal at maturity.
Instead, what investors receive at maturity is dependent upon
the price performance of the underlying stock and will be either
a cash payment equal to the original principal amount of the securities
or a predetermined number of shares of the underlying stock.
Any stock delivered at maturity will have a cash value below
the original principal amount of the securities, possibly significantly
below, and such value could be zero. Accordingly, investors may
lose some or all of their initial principal investment in the
Knock-in REXs are different from Reverse Exchangeable Securities
in that the knock-in feature provides investors with a limited
level of protection against depreciation of the market price of
the underlying stock to a certain predetermined level. In exchange
for such protection, Knock-in REX coupons typically are lower
than those of the Reverse Exchangeable Securities.
The maximum return on the securities is the original principal
amount plus the aggregate fixed coupon payments. Alternatively,
investors may lose all of their principal investment in the securities
and in such case, the only payment investors will receive on the
securities is the aggregate fixed coupon payments. Investors do
not benefit from any price appreciation in the underlying stock.
The Underlying Stock
Knock-in Reverse Exchangeable Securities may be structured to
provide investors with exposure to virtually any common stock
or American Depositary Receipt that is traded on the New York
Stock Exchange, Nasdaq National Market, American Stock Exchange,
Pacific Stock Exchange, Boston Stock Exchange or Philadelphia