Bonds are the largest investment instrument in the stock market, more so than the stock market. They are less exciting than stocks that go down and up at sharp rates, but they are the most important instrument in your investment portfolios – in mutual funds, provident funds and pensions.
Raising with the help of debt (bonds) is a way for the controlling owners not to dilute them and the other shareholders (raising capital dilutes them) and it is designed to generate profits. The equation is simple – you raise money at a certain interest rate, take the money and get a higher return on it than this interest rate. This method guarantees large profits and a return that exceeds the equity.
The debt issued bears interest that depends on risk and time – the risk that the debt will not be paid and the time until payment. The greater the risk and there is a fear that repayment ability will be compromised, the effective yield on the bonds will rise (the price of the bonds will fall), and vice versa – the greater the security in the company, the smaller the risk, the interest rate will fall (the bonds will rise). The price of the bonds depends on additional parameters , also macro data mainly interest and inflation.
One of the ways to protect money in a period of inflation is to invest in index-linked bonds, but they won’t help either – the highly rated bonds (low risk) for the short term provide a negative real return. so what are we doing? Or you increase the risk and also choose riskier bonds, then the yield will be correspondingly higher, or you also look at Coco bonds. These are bank bonds that provide a higher yield than regular bonds, but let’s start with what a bond actually is Coco?
What is Coco?
CoCo Bonds (Contingent Convertible Bond) is a debt instrument of the banks that in certain situations (extreme exceptions) can be perceived-considered as capital, that is, the banks can demand its conversion to capital (under conversion conditions that may harm the debt holders). That is, it A hybrid product with an element of capital and not a normal debt, not a normal bond. This is a bond that in the event of a big blow, bank insolvency, it does not behave like a normal bond, but is closer to a stock (then the risk is great and the loss can be very significant ), while in a normal situation, it is a bond for everything (if risk is limited).
How is such a bond priced? A coco bond is more risky than a bond, so the effective return on it will be higher. The local banks have a series of coco bond collections. It has become a very popular instrument for raising debt and it allows investors to diversify their investment portfolio with a product that allows them to maintain the value of the money and also receive a return. If they invest in “normal” bonds of the banks, the return as mentioned will be lower and even express a negative real interest rate. Koko has a positive real interest rate, you just have to remember – there are no free gifts. There is a risk here. The risk seems distant, unreal. A situation of great fears of the collapse of banks, loss of great capital, but such situations have occurred – especially in the subprime crisis in the USA at the end of 2008.
And it can still be interesting, here are the data on the Coco bonds that are traded on the local stock exchange:
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