Valuation and Analysis of Zero-Coupon Contingent Capital Bonds

45 Pages Posted: 30 Apr 2014

See all articles by Adam Metzler

Adam Metzler

Wilfrid Laurier University - Department of Mathematics

R. Mark Reesor

Wilfrid Laurier University; University of Western Ontario

Date Written: March 5, 2014

Abstract

We consider the valuation and analysis of zero-coupon contingent capital bonds (CCBs) in the structural framework. Using Doob's Optional Sampling Theorem (and making virtually no assumptions on asset value dynamics, the terms of conversion or the conversion trigger) we express the value of the CCB in terms of the effective loss imposed on CCB investors at conversion and quantify the impact that contingent capital has on traditional debt and equity. We show how a variety of conversion terms can be incorporated into a single framework and describe how they can be calibrated to ensure that seniority is respected and/or equity investors are not rewarded for poor performance. We provide numerical evidence indicating that the terms of conversion can fundamentally alter the nature of the CCB, a phenomenon that is of clear interest to investors, issuers and regulators.

Keywords: Contingent capital, CoCo Bonds, Structural Models, Optional Sampling Theorem

Suggested Citation

Metzler, Adam and Reesor, R. Mark, Valuation and Analysis of Zero-Coupon Contingent Capital Bonds (March 5, 2014). Available at SSRN: https://ssrn.com/abstract=2430245 or http://dx.doi.org/10.2139/ssrn.2430245

Adam Metzler (Contact Author)

Wilfrid Laurier University - Department of Mathematics ( email )

Canada

R. Mark Reesor

Wilfrid Laurier University ( email )

75 University Ave W
waterloo, ontario N2L 3C5
Canada

University of Western Ontario ( email )

1151 Richmond Street
Suite 2
London, Ontario N6A 5B8
Canada

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