Quick Finance Tip – Warrants and Contingent Convertible Bonds (CoCos)

​A warrant is not an embedded option but an “attached” option, and is considered as a yield enhancement. It entitles the holder to buy the underlying stock at a fixed exercise price until the expiration date. Contingent convertible bonds (aka “CoCos”) have write-down provisions where the bond is convertible on the downside. For instance, in the event some bank experiences losses that reduces its equity below the minimum requirements, CoCos reduces the bank’s likelihood of default, thus reducing systematic risk. Ultimately, because the conversion is not at the option of the bondholder, but automatic, higher yields are provided to compensate higher risk.