I stumbled upon the following bond: ISIN: DE000A189FZ7 How can a serious company like BayerAG which is a german Dax corporation offer a bond with over 200% profit within 5 years. Where is the hidden risk in this one

EDIT: website i used: https://www.comdirect.de/inf/anleihen/detail/uebersicht.html?ID_NOTATION=175272638 it is german and the value i was looking at is "rendite p.a."

  • 3
    Where are you getting a 200% profit from? – D Stanley Sep 10 '19 at 15:28
  • @DStanley From the linked site, there's this line "Rendite p.a. 236,081 %", and when I googled "rendite", it returned "yield". I assume that's where the OP is getting it from. I also assume they're using the comma as a Eurozone(?) decimal point. – Lawrence Sep 10 '19 at 17:03
  • That's correct comma as the decimal point – TimWalter Sep 10 '19 at 17:35

Looking at the prospectus for this bond, it is a mandatory convertible bond.

The yield is calculated as if you are holding the bond to maturity and getting the full par amount (100,000 EUR per bond). Since the current market price is about 81% of par, that's a return of 23% over 3 months, or 250% annualized.

In reality, you're buying a bond that is going to be converted to, at most, 1,247 shares of Bayer stock. The current price is about 67 EUR for share, so you're actually getting 83,549 EUR worth of stock, which, when you account for accrued interest, is about what the bond is worth. You actual return will be minuscule since the price of the bond is roughly equivalent to the value of the converted stock this close to maturity.

  • What exactly does that mean? If I invest 1,000€ today, do I receive Bayer shares worth € 1,819.13 in 2 months? What stops me from selling those stocks immediately? Still seems like a pretty good deal to me. What did I miss? – Philipp Sep 11 '19 at 13:46
  • No, you're going to get stock that's worth about 835 EUR in 2 months (based on the market price). For every 100,000 EUR (the face value of this bond), you'll get at most 1,247 shares, which was worth about 67 EUR per share at the time of your quote. – D Stanley Sep 11 '19 at 14:06
  • So was it issued with 250% yield? Or is what happened that it was issued with a lower yield, but the price of Bayer stock decreased, and so the market price of the bond also decreased, bumping the effective yield up? – Acccumulation Sep 11 '19 at 16:56
  • @Acccumulation I assume the latter, but haven't dug too deeply. It was certainly not issued with a 250% yield. Also keep in mind that the "250% yield" is fictitious. That's what you'd get (annualized) with the current price if the bond were held to maturity and redeemed at par, which is not possible since the bond must be exchanged for stock. – D Stanley Sep 11 '19 at 17:00

The value of a bond has two parts, the interest payments and the final payment (face value). The 200% rate tells you about the ratio between the two, and is not your profit. Since real interests are about 0%, you will have to about 3 times the face value up front.

So if you have a face value of 1000 EUR, you'll get 2000 EUR in interest, and you'll pay 3000 EUR for that.

  • 1
    Where is the 2,000 EUR in interest coming from? The bond pays a 5.625% coupon, so the coupon will be 56.25 EUR, not 2,000 EUR. – D Stanley Sep 10 '19 at 15:27
  • @DStanley: From the title, that's what a 200% yield is? – MSalters Sep 10 '19 at 15:29
  • if you search for that bond you can see the actual coupon. I don't know where the 200% is coming from but it most certainly not from the coupon. If the bond were selling for 50% of its face value then you'd have a 200% yield. – D Stanley Sep 10 '19 at 15:30

It is a statistical trap.

Don't let the yield ratio blind your eye. As many answers already pointed out, the yield ratio is based on the mandatory convertible warrant issuance price.

Mandatory convertibles bonds/warrants is a bet on futures and funding the company debt without burdens it with real payout when the bonds/warrant matures.

The DE000A189FZ7 statement says:

  • The Minimum Conversion Price is adjusted to EUR 80.1522
  • the Maximum Conversion Price is adjusted to EUR 96.1827

And you can just ignore complicated jargon and the wiki explain it clearly

Note that if the stock price is below the first conversion price the investor would suffer a capital loss compared to its original investment (excluding potential coupon payments). Mandatory convertibles can be compared to forward selling of equity at a premium.

Currently, the stock is trading around EUR 69.50. The bond par value 100 and the interest rate is 5.65%. When the bond matured, the investor will get EUR 5.65 but forced to convert with a price of EUR 80.1522.

Say in 2 months, the stock is going up to EUR75, people who bought the bond today (~EUR 81, ) will get EUR 5.65 and the equivalent stock, thus EUR 75 + 5.65. It looks like a breakeven.

But here is the catch: since BayerAG is price ~EUR69.50 today, for the same EUR75 projection, you can buy 15.7% more stock than buying the mandatory convertible. This means when the stock reach rises from EUR 69.50 to EUR 75, buying the stock will give you 6.49% returns.

p/s: nevertheless, whoever hold the convertible bonds can always declare it as loses for the tax credit.

  • For the last 3 paragraphs, the bond is currently trading at about 81% of par, so when you tack on the coupon, buying the bond and buying the stock should be roughly equivalent. – D Stanley Sep 11 '19 at 14:51
  • @DStanley IMHO, for the same amount of money, buying the stock will give you better returns. – mootmoot Sep 11 '19 at 14:54

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