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CFA Level I · CFA Level I Exam · Fixed-Income Instrument Features

A contingent convertible bond (CoCo) issued by a bank is designed to convert into equity if the bank's capital ratio falls below a specified level. The primary purpose of this contingency provision is most likely to:

The main purpose is to absorb losses and recapitalize the bank during stress. When the capital ratio falls below the trigger, the debt converts to equity, which reduces liabilities and boosts regulatory capital automatically, without needing taxpayer support or a new share issue.

  1. Aallow the issuer to repurchase debt cheaply when rates fall
  2. Babsorb losses and recapitalize the bank during financial stressCorrect
  3. Cgive investors the right to sell the bond back at par at any time

Explanation

CoCos convert to equity when a trigger such as a capital ratio breach occurs, reducing debt and strengthening capital without a bailout. Repurchase when rates fall describes a call option; selling back at par describes a put.

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