Why are Cocos considered a TYPE IV Liability?
I understand that we won’t know when the COCO will be converted into equity, but don’t we know how much we will convert? Don’t they work just like a convertible bond?
Or if it will be converted.
No.
And even if we did, not knowing when they will be converted means that we don’t know if we’ll be paying a coupon in 1 year, 2 years, 5 years, or 10 years.
Apparently not, but even if they did, they’d still be Type IV liabilities.
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thanks bob
You’re welcome, Mary.
I just have one more question about the topic. But lets we are talking about convertible bonds and not contingent convertible bonds. Even convertible bonds would be considered TYPE IV because again besides the fact that we don’t know when the bond will be converted and if it will ever be converted, the same applies to the amount of the conversion because it all depends on how the underlying stock is performing. Right?
I believe the curriculum says they are Type II (known amount of cash flow/coupon but timing unknown since it may convert).
They’re not.
They’re Type IV.
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Thanks - conflated it with callable categorization.
@S2000magician everything you mentioned in your first post is true for a callable bond - how come that’s a Type 2 liability then? The cash flow amount is uncertain - if you call a 4 year callable bond at year 2 then the remaining coupon payments will cease to exist, and you’ll have less liabilities for the 3rd and 4th year. There’s also an uncertainty about when it will be called (if it’ll be called at all).