Optimal Design and Pricing of Bank Perpetual Bonds with Conversion Clauses Based on Risk Compensation Effect
Effect is an important criterion to measure the success or failure of product design.This paper innovatively analyzes and quantifies the risk compensation effect inherent in perpetual bonds,and optimizes the conversion clause based on the control of risk compensation effect.It especially considers the scenario of"partial conversion",which means perpetual bonds held by each investor would be converted into equity in a certain proportion in times of mild financial distress,which compensates for the drawbacks of the existing"one-size-fits-all"mode.Furthermore,it proposes a structured pricing method for the equity value of each stakeholder that is suitable for the designed conversion clause,and constructs a constraint optimization model to determine the conversion ratio that reflects the incentive compatibility of each stakeholder,fully reflecting the"co construction and sharing"characteristics between the issuer and investors.The numerical analysis shows that the risk compensation effect can be well controlled by appropriate design.The conversion clause provided not only takes into account the interests of investors but also protects the interests of shareholders.Meanwhile,it increases the value of the issuing bank.In addition,the conversion clause provided is operable under various scenarios.It is expected to provide useful references for the benign development of perpetual bonds.
bank perpetual bondsdesign of conversion clausesrisk compensation effectincentive compatibility
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