Every financial crisis brings drastic changes in the financial markets and you can see the development and use of new financial instruments on the basis of existing rules and regulation or levied restrictions to recover the prevailing financial crisis.
However, the world financial market was focusing on the execution of Basel III. Many of the financial industries have already done workout to figure out the best alternative to improve the bond market transaction, and they propounded Contingent Convertible bonds, which is also popular as co-co bonds.
Diverting the minds from traditional convertible bonds market, Co-Co bonds are convertible within a maturity time when the Capital Ratio falls below a particular percentage, which set forth by Basel III. If it is not the case about the earliest conversion date, then the rate of bond will be rearranged according to prevailing 5-yr Treasury rate with a predetermined premium.
For instance, use the current issuance by Rabobank, who issued $2 billion (2016-2049) Co-Co bonds early in the year at the rate of 8.375%, and a coupon will be reset during 2016 about 642Bp premium on the 5-yr Treasury yield. However, the issued bonds is rated as AAA, Co-Co bonds are ranked as A, which helps business investors for oversubscribing new issuance by 10:1 which all are done for the higher yield in a exhausted interest rate market.
In the result of the securitization and subprime blow in 2007-2008, it seems to be contradictory that still the financial investors are trying to invest in bonds, taking high risk of financial losses. This investment is exactly like gamble for those investors.
However, the bank interest plays vital role for the increment of bond price. The investors wish central bank to reduce the rate of interest so that the savvy money is poured in the bond market. Most of the investors are searching the best alternatives for higher return and current bond market can be the potential alternative, if bank interest rate does not go up.
There are some questions which are raised frequently is about the price of other financial instruments like CSs, treasury bills, commercial papers and so on. Financial analysts say that it will take some more time for market stability.
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