Bank of America reported $259.2 million in sales of structured notes linked to a single stock between January and October of 2013, over five and-a-half times greater than the $46.4 million sold between January and October of 2012.
Meanwhile, U.S. issuance of securities tied to single stocks rose to $6.3 billion, up 24 percent.
This striking expansion in sales of structured notes linked to a single stock (as opposed to indexes) serves as evidence of a changing investment market: investors are accepting higher volatility in exchange for potentially bigger gains.
As stock benchmarks rose while the Federal Reserve stimulus programs have kept interest rates under .25 percent for five years (compared to the 1.0% federal funds rate seen in 2009, for instance), investors have been enticed with better coupon terms for single stock-linked notes. In other words, investors have been compensated for the risk of greater volatility in prices—larger price swings.
Bank of America joins Apple Inc. in the news of popular single stock-linked notes as BofA sold $148 million of Apple-tied notes on May 16, which is the largest offering linked to one company of 2013.
Yet with increased volatility comes substantial risk.
Earlier this year, we reported on the Revenge of the Reverse Convertible, a worst-case scenario come true in which Apple shares, valued at over $700 per share at the onset of a reverse convertible term in September 2012, closed at $439.88 in late January 2013, when the first of the reverse convertible notes came due, resulting in losses in excess of 40% of investor principal.
Reverse convertible or structured note offerings can be extremely tempting, epecially when interest rates are so low, and the note offers income at above market rates. But these securities are equally risky and dangerous in which investors can be put with the underlying stock if the price of the stock happens to decline below a limit or knock-in price at any point during the term of the investment. Instead of a return of invested principal, the investor receives shares of the linked company. As a result, burned investors suffer double digit percentage losses.
In the case of Apple-tied notes—which Wall Street numbers confirmed as extremely popular—the results were devastating.
Wall Street does not like to admit is that reverse convertible securities are commission generating slot-machines. Generally, a reverse convertible note has a relatively short-term, three months. When the note matures, if the investor wants to keep investing, he or she must buy a new Revcon. Each RevCon pays a commission of about 2% of the invested principal. Over a one year period, the broker makes an 8% commission on the invested money. The commission structure gives every incentive for brokers to push these structured products to mom-and-pop investors. The hard fact of the matter is many yield-seeking investors fail to receive the disclosures and balanced presentations explaining the outsized risk of loss for trying to squeeze out some additional yield from their investments.
If you have purchased or participated in structured notes or reverse convertibles that were unsuitable for your investment objectives or profile, and such involvement has proven harmful to your investments or interests, please call The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for an investigation and consultation.
News: Structured Notes Tied to BofA Lead Single-Stock-Linked Increase (Bloomberg)