What characterizes contingent convertibles (CoCos)?

Contingent convertibles, commonly referred to as CoCos, are primarily characterized as fixed income securities that convert to equity upon the occurrence of specific trigger events. These triggers are typically linked to the financial health of the issuing bank, such as a decline in its capital ratio. When these predetermined conditions are met, the CoCos convert their status from a debt instrument to equity, allowing the institution to shore up its capital by effectively issuing shares.

This feature establishes CoCos as a hybrid financial instrument, possessing characteristics of both debt and equity. The conversion mechanism is designed to protect the bank during periods of financial distress, as it enables the bank to strengthen its balance sheet without resorting to conventional equity financing. As such, this distinct characteristic plays a crucial role in maintaining financial stability.

In contrast to CoCos, other types of securities described in the options do not incorporate this unique conversion feature based on contingent triggers. Different types of securities, like equity securities that pay dividends, typically do not convert to other forms and provide returns through dividend payments. Fixed maturity bonds that cannot be redeemed before maturity, on the other hand, maintain a rigid structure and lack any potential for conversion. Similarly, securities without fixed terms usually imply a different level of liquidity and investment return practices