Question

An elderly customer that is currently invested in bonds for income is concerned about declining yields due to record low interest rates. He has contacted his registered representative and inquires about purchasing a reverse convertible note on a Blue Chip stock because it offers a higher yield. The customer should be informed that:

Answer 1

Answer:

he or she can potentially lose 100% of the principal amount due to a stock price decline.

Explanation:

The elderly investor is trying to invest in bluchip stocks that have high returns in order to recoup losses from his previous investment.

Generally the higher the returns on an investment the higher the risk of that investment. Investors are likely to lose their capital in higher yield investments.

A reverse convertible note is a product that is the obligation of the issuing bank and not the corporation. So if price falls below the knock in price, customer will only receive the stock at maturity and not at par. The stocks received could be worthless and investor could loose all his principal.