DEFINITION of 'Revertible'

Refers to a special kind of convertible corporate bond that automatically converts itself into shares of the company's stock in the event that the underlying stock drops below a certain price. This stands in contrast to traditional convertible bonds, which the bondholder may or may not choose to convert into shares of company stock. These revertible bonds generally have a time limit or expiration date when the bond will automatically convert into stock or forever remain a bond. Typically, these bonds pay very high interest rates and are offered by companies that are considered well-below investment grade. They are also known as reverse convertible bonds.

BREAKING DOWN 'Revertible'

Depending on your point of view, revertible bonds or notes can be advantageous or dangerous to an investor's bottom line. Considering that the automatic conversion feature of these bonds only kicks in if the stock price plummets, a conversion would likely reflect the marketplace viewing the company as suddenly financially unstable. In this event, the company's stock may be more attractive to investors looking to abandon ship, since a thinly traded stock may be easier to unload than an illiquid bond. But, it also may set up an investor who wishes to stay invested for a total loss, since bondholders get priority over common stock holders when it comes to a corporation liquidating its assets.

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