Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/257885 
Year of Publication: 
2019
Citation: 
[Journal:] Risks [ISSN:] 2227-9091 [Volume:] 7 [Issue:] 2 [Article No.:] 47 [Publisher:] MDPI [Place:] Basel [Year:] 2019 [Pages:] 1-35
Publisher: 
MDPI, Basel
Abstract: 
Contingent Convertible (CoCo) is a hybrid debt issued by banks with a specific feature forcing its conversion to equity in the event of the bank's financial distress. CoCo carries two major risks: the risk of default, which threatens any type of debt instrument, plus the exclusive risk of mandatory conversion. In this paper, we propose a model to value CoCo debt instruments as a function of the debt ratio. Although the CoCo is a more expensive instrument than traditional debt, its presence in the capital structure lowers the cost of ordinary debt and reduces the total cost of debt. For preliminary equity holders, the presence of CoCo in the bank's capital structure increases the shareholder's aggregate value.
Subjects: 
credit risk
contingent convertible debt
financial modelling
risk management
financial crisis
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Article
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