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INVESTOR RISK SUMMARY

 

 

Principal at Risk: Purchase of a Reverse Convertible Security carries with it the risk of loss of some or all of the initial investment (the principal). By purchasing the Reverse Convertible Security, the investor also indirectly sells the issuer a put option (except in the case of an Upside-Down Reverse Convertible)  which is the right for the issuer to deliver the underlying stock to the investor at maturity, that stock having lost some or all of its value since the original strike price was established. The purchaser of a Reverse Convertible Security should be financially capable of withstanding a loss, should understand how the option works and should be comfortable with the potential to receive stock worth less than the original investment instead of cash at maturity.

Liquidity: Reverse Convertible Securities are designed to be held to maturity, although investors are not required to do so. Most issuers intend to provide a secondary market but they are under no obligation to do so. Some issuers post secondary pricing on their websites during market hours, where pricing fluctuates intraday.*  When considering selling in the secondary market, the investor should contact his or her broker. Again, while secondary marketing of a Reverse Convertible Security is usually a viable option, there is no guarantee that a secondary market for the security will be available. In addition, market variables make secondary pricing unpredictable.

Creditworthiness of the Issuer: In addition to evaluating the market for the underlying securities, the investor should investigate the creditworthiness of the issuer to evaluate its ability to make principal and interest payments.

Issuer Call: There are some Reverse Convertible Securities that are issued with a call feature. This allows the issuer (not the investor) to redeem the notes before the maturity date.  If the security is called, the investor may be faced with investing within a lower interest rate environment.

Taxes:  For full information regarding the tax consequences of Reverse Convertible Securities, investors should review the prospectus or offering circular and consult with their tax advisor. Special tax treatment applies to Reverse Convertible Securities because they are comprised of two financial instruments - a debt instrument and an option. The debt portion is reported annually as income based on the coupon rate of a comparably investment grade-rated (e.g., AA or Aa3) note of the same maturity. Thus, because the Reverse Convertible pays a higher coupon than the conventional notes upon which the comparison is based, U.S. investor taxes are based on a coupon rate that is lower than the actual rate. The option component is taxed at maturity as a short-term capital gain if cash (rather than shares of the underlying stock) is received at maturity. If shares are delivered at maturity (meaning that the principal has been reduced), the option component will reduce the tax basis of the underlying shares; no taxable event occurs until the shares are sold.


*Noted here for information purposes only; refer to issuer-specific materials for complete details.

This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument and is not intended to provide legal, accounting or tax advice or an investment recommendation. Although the information contained herein is believed to be correct, we make no guarantees, express or implied, as to its completeness or accuracy. Structured Products are not suitable for all investors. Risks may include loss of principal or the possibility that at expiration the investor will own the reference asset at a depressed price. Structured Products often limit or cap upside participation in the reference asset, particularly if some principal protection is offered or if the security pays an above-market rate of interest. They contain a derivative component whose profit and loss potential emulates an option contract, particularly those where principal invested is at risk from market movements in the reference security. Even though Structured Products pay interest like debt securities, the potential loss of the principal for many such products may make them unsuitable for investors seeking alternatives to conventional debt securities. Certain securities discussed in this material are registered with the Securities Exchange Commission (the "SEC") and the issuer of those products has filed a registration statement (including a prospectus, a prospectus supplement and a preliminary pricing supplement) with the SEC. All relevant offering documents including term sheets and prospectuses should be consulted prior to investing in these securities. Certain securities discussed in this material are not registered with the SEC but are issued pursuant to an exemption from registration. Before Investors make any investment, they should read the prospectus supplement and preliminary pricing supplement for registered securities filed with the SEC or the relevant offering documents for non-registered securities for more complete information about such issuer and the securities being offered. Investors should understand characteristics, risks, and rewards of each Reverse Convertible as well as those of the referenced asset before making a decision to invest in the security. Investors should contact their own accounting, tax or legal advisors to review the suitability of any investment.