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Explanation:
Contingent convertible bonds (CoCos) can sometimes be more expensive to issue than equity due to the high yields demanded by investors to compensate for the trigger and conversion/write-down risks, and because the interest may not be tax-deductible in all jurisdictions. However, since CoCos are classified as debt until the trigger is breached, they do not dilute the equity base, thereby allowing the bank to report a higher return on equity (ROE). Option A is incorrect because CoCo conversion is automatically triggered by predefined conditions (e.g., capital ratio falling below a threshold), not at the holder's option. Option B is incorrect as it describes a puttable bond, not a CoCo. Option C is incorrect because CoCos are widely structured specifically to qualify as Additional Tier 1 (AT1) capital under Basel guidelines.
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A
CoCos give their holders the option to convert them into the equity of the issuing bank either before maturity or at maturity, depending on the type of CoCo.
B
CoCos give their holders the option to convert their medium- or long-term debt to short-term debt if certain interest rate conditions specified in the indenture are met.
C
CoCos may be included in Tier 2 capital but not in Tier 1 or Additional Tier 1 capital due to the risks they pose to the issuing bank and the difficulties in pricing them.
D
CoCos can be more expensive for banks to issue than equity, but they allow the issuing bank to report a higher return on equity until they are converted.