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Reverse Convertible Bond
Categories: Options, Bonds and Treasuries,
RCB. A type of bond that can be converted into cash or stock at a specific date. Unlike a convertible bond, the issuer, and not the bond holder, has the right to convert the bond. The value of the bond is derived from the underlying shares, making the bond an embedded derivative. A convertible bond can be considered a call option, while a reverse convertible bond can be considered a put option held by the issuing company. If the price of the underlying stock falls below a certain point, the issuer will exercise the option and convert the bond into shares, thus ending coupon payments and principal that the holder would have otherwise received. bond holders demand a higher interest rate and shorter duration for this type of bond, since the bond holder could wind up with low-value shares instead of the bond.
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Definition / Meaning of
Circuit Breaker
Categories: Investing and Trading,
After the stock market crash of 1987, stock and commodities exchanges established a system of trigger-point rules known as circuit breakers. They temporarily restrict trading in stocks, stock options, and stock index futures when prices fall too far, too fast.Currently, trading on the new york stock exchange (NYSE) is halted when the dow jones industrial average (DJIA) drops 10% any time before 2:30 p.m., sooner if the drop is 20%. But trading could resume, depending on the time of day the loss occurs. However, if the DJIA drops 30% at any point in the day, trading ends for the day. The actual number of points the DJIA would need to drop to hit the trigger is set four times a year, at the end of each quarter, based on the average value of the DJIA in the previous month.The only time the circuit breakers have been triggered was on October 27, 1997, when the DJIA fell 554 points, or 7.2%, and the shut-down level was lower. In fact, the DJIA has dropped as much as 10% in a single day only three times in its history.
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