The Pricing of already issued Contingent Convertible Bonds (CoCo-Bonds)
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Seminar paper from the year 2011 in the subject Business economics - Banking, Stock Exchanges, Insurance, Accounting, grade: 1,2, University of Innsbruck (Banking and Finance), course: Risk Management, language: English, abstract: In the year 2007 one of the biggest financial crisis in worlds history has begun. Itleads to the bankruptcy of huge financial institution followed by the bailout of banksthrough the national government and a downturn in worldwide stock markets. Thefinancial crisis has also shown that the capitalizations of numerous financial instituteswere not adequate and several co...
Seminar paper from the year 2011 in the subject Business economics - Banking, Stock Exchanges, Insurance, Accounting, grade: 1,2, University of Innsbruck (Banking and Finance), course: Risk Management, language: English, abstract: In the year 2007 one of the biggest financial crisis in worlds history has begun. Itleads to the bankruptcy of huge financial institution followed by the bailout of banksthrough the national government and a downturn in worldwide stock markets. Thefinancial crisis has also shown that the capitalizations of numerous financial instituteswere not adequate and several components of banks equity could not fulfil theirplanned function. To save the global financial system from collapsing many banksreceived lot of money from the government.To avoid another future crisis and huge bailouts by the national government, somefinancial experts and leading economists proposed a new financial instrument, calledContingent Convertibles Bonds ("CoCo-Bonds"). They are considered to be anopportunity to improve the equity base of banks in times of crisis. CoCo-Bonds are aspecial form of bonds, which convert automatically to equity after a predefinedincidence.Three large banks have already issued these new financial instruments; The LloydsBanking Group (2009), Rabobank (2010) and the Credit Suisse (2011). The aim ofthis paper is to analyse the structure and the pricing of these already issued CoCo-Bonds. In the first part the functionality of the CoCo-Bonds will be explained. It willalso provide a summary of the specification of the already issued CoCo-Bonds. Thethird part, which is the main part, is focused on the pricing modalities of these newfinancial instruments. Two different approaches will be considered. First the creditderivatives approach and seconds the equity derivatives approach. In the end of thepaper both approaches will be applied to the already issued CoCo-Bonds of Lloydsand Credit Suisse.
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