Explanation:
CoCos are debt securities that convert to equity, not the other way around. They also provide an opportunity for banks to increase capital adequacy without having to direct cash flow at probably the most inopportune time. These instruments are not guaranteed.
(Book 1, Module 8.2, LO 8.f)
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Question 75
One of the resulting consequences of the financial crisis of 2007-2009 was a realization that capital adequacy was more difficult to determine than previously thought. A specific stress-response was the initiation and issuance of contingent convertible securities (CoCos). The best description of how CoCos can help alleviate capital adequacy problems is that:
A
these mainly equity instruments convert to bonds, yielding a buffer for debt exposure.
B
these mainly bond instruments convert to equity, forming a buffer against excessive risk taking.
C
these instruments require financial institutions to earmark cash flow to capital buffers at the most appropriate time.
D
CoCos are government-backed guarantees that banks will be able to weather the most intense financial storms.
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