Note The investor believes the investment is linked to a stock, but in truth is debt of citibank A Unique Opportunity to Invest for Income History has proven that the stock market has offered significant growth potential to long-term investors desiring capital appreciation. However, the stock market can also present many attractive opportunities in the short-term for investors who wish to generate... [more]
Note The investor believes the investment is linked to a stock, but in truth is debt of citibank
A Unique Opportunity to Invest for Income
History has proven that the stock market has offered significant growth potential to long-term investors desiring capital appreciation. However, the stock market can also present many attractive opportunities in the short-term for investors who wish to generate additional income in their portfolios.
Smith Barney has created an equity based short-term investment that offers current income as well as limited protection against the decline in the price of the stock on which it is based—ELKS (Equity Linked Securities).
HOW ELKS WORK
ELKS are equity-linked debt securities issued by Citigroup Funding Inc. most of which have a maturity of approximately one year. ELKS pay a fixed coupon with a yield greater than the underlying stock’s current dividend yield and the yield that would be payable on a conventional debt security of the same maturity and issuer. At maturity, ELKS return either a fixed number of shares ofthe underlying stock or the principal amount invested, in cash. If the price of the underlying stock declines by the pre-determined percentage (e.g., 25%) or more at any time during the term of the ELKS, the investor will receive a fixed number of shares of the underlying stock. If, however, the price of the underlying stock does not decline by the pre-determined percentage (e.g., 25%) or more at any time during the term of the ELKS, the investor will receive, in cash, the principal invested. The ELKS therefore have the potential to outperform the stock on which they are based. ELKS are not principal protected. The ELKS are a series of unsecured senior debt securities issued by Citigroup Funding. Any payments due on the ELKS are fully and unconditionally guaranteed by Citigroup Inc., Citigroup Funding’s parent company. The ELKS will rank equally with all other unsecured and unsubordinated debt of Citigroup Funding, and the guarantee of payments, if any, due under the ELKS will rank equally with all other unsecured and unsubordinated debt of Citigroup. The return of the principal amount of your investment in the ELKS at maturity is not guaranteed.
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n a reverse convertible, you give $100 to a bank for some period, like a year; it pays you a relatively high rate of interest, say 10%. The $100 is virtually invested (no one actually has to buy the stock) in some underlying stock, like Apple. If at the end of the period the stock is above a threshold, like $80, you get your $100 back; if it is below the threshold, you get the stock instead. (The terms can depend on whether the stock ever went below the threshold and where it is at the end of the period, which makes the deal worse for the investor, but that’s the basic idea.)
The simplest thing to compare this to is just buying the stock. Compared to buying the stock, there are three outcomes:
1. The stock ends up below $80: In this case, the reverse convertible is slightly better, because you got the $10 in interest, which is probably more than the dividends you gave up.
2. The stock ends up between $80 and $110: Again, the reverse convertible is better, because you got $110 (your principal plus interest); it’s a little better if the stock ends up close to $110, a lot better if the stock ends up at $81.*
3. The stock ends up above $110: Here, you do anywhere from a little worse (if the stock ends at $111) to much, much, much worse (if the stock goes over $200).
The expected value for $100 of stock after one year is about $108 (6% real return on equities plus 2% inflation), so the chances of a gain and a loss (relative to buying the stock) are roughly equal; however, the distribution of returns is asymmetric, because if the stock does poorly your gains are capped, while if the stock does well your losses are not capped. Whether a given reverse convertible is a good deal or not depends on the specific terms – the interest, the term, the threshold, the volatility of the stock, and the transaction fee.
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Response by Riversider
over 16 years ago
Posts: 13572
Member since: Apr 2009
And my question. We're bailed this company out! They need to answer and be accountable for this garbage.
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Response by stlblufan
over 16 years ago
Posts: 64
Member since: Mar 2009
Equity derivatives, including reverse converts, are not new, and every bank on the street issues them.
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Response by Riversider
over 16 years ago
Posts: 13572
Member since: Apr 2009
are not new, and every bank on the street issues them
chickens are coming home to roost. It's clear that the banks are getting retail clients ot lend to them at below market rates. A number of stories point to customers not knowing they have really written an out of the money put on the stock. Cleary the returns are asymetric as pointed out. No upside, unlimited downside. Plus why aren't these rated?
This product isn’t allocating capital anywhere – at least not to the company you are betting on. It’s allocating your capital to the bank, which has one year to figure out how to make more money than it has to pay you back, but this serves the same allocation function as an old-fashioned bond (plus some additional risk). Or the bank might be an intermediary with another investor on the other side of the transaction, in which case you are simply betting each other and the bank is taking a fee.
A reverse convertible is just a made-up security that creates a different return distribution than conventional securities. It doesn’t help Apple raise capital. And there is no investor who woke up one day thinking he needed the wacky return distribution it provides: basically, a stock with a 10% cap on gains and a small sweetener in case of losses, with some weird behavior in the middle (the $80-110 range). The complexity only serves two real purposes. First, it creates transaction fees for the bank that it can’t charge you for buying a stock; and second, it makes it harder for investors to understand what they are buying, which means that at least some of them will buy it, even if it’s bad for them. In other words, this is an innovation that creates no value, but just redistributes it between investors and banks, with the banks taking a transaction fee just like 0 and 00 on a roulette wheel."
It's just another fee-generator. Investors should steer clear,
Oct. 12 (Bloomberg) -- A U.S. judge stopped New York Attorney General Eliot Spitzer from investigating whether residential lending practices are discriminatory at national banks, including Citigroup Inc., JPMorgan Chase & Co. and HSBC Bank USA
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Citi says, "HEADS I WIN , TAILS YOU LOSE!"
http://seekingalpha.com/article/143832-reverse-convertibles-more-financial-innovation?source=article_lb_articles
n a reverse convertible, you give $100 to a bank for some period, like a year; it pays you a relatively high rate of interest, say 10%. The $100 is virtually invested (no one actually has to buy the stock) in some underlying stock, like Apple. If at the end of the period the stock is above a threshold, like $80, you get your $100 back; if it is below the threshold, you get the stock instead. (The terms can depend on whether the stock ever went below the threshold and where it is at the end of the period, which makes the deal worse for the investor, but that’s the basic idea.)
The simplest thing to compare this to is just buying the stock. Compared to buying the stock, there are three outcomes:
1. The stock ends up below $80: In this case, the reverse convertible is slightly better, because you got the $10 in interest, which is probably more than the dividends you gave up.
2. The stock ends up between $80 and $110: Again, the reverse convertible is better, because you got $110 (your principal plus interest); it’s a little better if the stock ends up close to $110, a lot better if the stock ends up at $81.*
3. The stock ends up above $110: Here, you do anywhere from a little worse (if the stock ends at $111) to much, much, much worse (if the stock goes over $200).
The expected value for $100 of stock after one year is about $108 (6% real return on equities plus 2% inflation), so the chances of a gain and a loss (relative to buying the stock) are roughly equal; however, the distribution of returns is asymmetric, because if the stock does poorly your gains are capped, while if the stock does well your losses are not capped. Whether a given reverse convertible is a good deal or not depends on the specific terms – the interest, the term, the threshold, the volatility of the stock, and the transaction fee.
And my question. We're bailed this company out! They need to answer and be accountable for this garbage.
Equity derivatives, including reverse converts, are not new, and every bank on the street issues them.
are not new, and every bank on the street issues them
chickens are coming home to roost. It's clear that the banks are getting retail clients ot lend to them at below market rates. A number of stories point to customers not knowing they have really written an out of the money put on the stock. Cleary the returns are asymetric as pointed out. No upside, unlimited downside. Plus why aren't these rated?
http://baselinescenario.com/2009/06/17/more-financial-innovation/
"But the question I want to ask is . . .
What the hell is the point of this product?
....
This product isn’t allocating capital anywhere – at least not to the company you are betting on. It’s allocating your capital to the bank, which has one year to figure out how to make more money than it has to pay you back, but this serves the same allocation function as an old-fashioned bond (plus some additional risk). Or the bank might be an intermediary with another investor on the other side of the transaction, in which case you are simply betting each other and the bank is taking a fee.
A reverse convertible is just a made-up security that creates a different return distribution than conventional securities. It doesn’t help Apple raise capital. And there is no investor who woke up one day thinking he needed the wacky return distribution it provides: basically, a stock with a 10% cap on gains and a small sweetener in case of losses, with some weird behavior in the middle (the $80-110 range). The complexity only serves two real purposes. First, it creates transaction fees for the bank that it can’t charge you for buying a stock; and second, it makes it harder for investors to understand what they are buying, which means that at least some of them will buy it, even if it’s bad for them. In other words, this is an innovation that creates no value, but just redistributes it between investors and banks, with the banks taking a transaction fee just like 0 and 00 on a roulette wheel."
It's just another fee-generator. Investors should steer clear,
http://www.streeteasy.com/nyc/talk/discussion/12208-citi-is-a-criminal-enterprise
Oct. 12 (Bloomberg) -- A U.S. judge stopped New York Attorney General Eliot Spitzer from investigating whether residential lending practices are discriminatory at national banks, including Citigroup Inc., JPMorgan Chase & Co. and HSBC Bank USA
see the fox spitzer thread....