The previous chapter demonstrated how the information provided under the Prospectus Directive is used to determine the risk connected with offered securities and, consequently, their price. Only if investors possess such information will they be able to make a decision on the purchase of securities. Once investors purchase a financial hybrid, the issuer raises regulatory capital. With that, the role of the primary market in the process of raising capital is done. Some investors may be willing to keep the debt securities on their accounts until the securities mature (or, in case of perpetual hybrids, until the first call date), collecting coupon payments and waiting for the principal to be repaid (called). However, it would be impossible to raise capital without granting investors the ability to sell their securities. The existence of the secondary market is necessary for the effective operation of the primary market. That is especially true when discussing the equity market, because debt securities are traditionally considered more of a buy and hold investment, so the debt market is less liquid than the equity market. In the case of financial hybrids, recent RBS surveys demonstrate that the liquidity of the instrument is also taken into account by investors. However, we need to note that CoCo investors pay relatively little attention to past volatility of liquidity. Instead, they tend to focus on (i) the fundamentals of the issuing financial institution, (ii) the distance from the trigger point and (iii) the risk of coupon deferral and type of conversion (RBS, May 2014).
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