Question

    AT1 bonds, also known as Additional Tier 1 bonds, are a

    type of debt instrument issued by banks and financial institutions to raise capital. AT1 Bonds are also commonly known as _________ 
    A Compulsorily Convertible bonds Correct Answer Incorrect Answer
    B Optionally convertible bonds Correct Answer Incorrect Answer
    C Perpetual Bonds Correct Answer Incorrect Answer
    D Non-redeemable bonds Correct Answer Incorrect Answer
    E Tier II Bonds Correct Answer Incorrect Answer

    Solution

    AT1 bonds or additional tier 1 bonds are perpetual bonds as these do not have any maturity date.   These are allowed as part of the Tier I capital for Banks under Basel III guidelines.  These bonds are riskier than other normal bonds because of the following features:  The issuing bank has the discretion to skip coupon payment. Under normal circumstances it can pay from profits or revenue reserves; however in case losses for the period, the coupon payment can be skipped.   The bank has to maintain a common equity tier I ratio of 5.5%, failing which the bonds can get written down or converted into equity. 

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