Separable Coupon and Call Option Bond Components

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Solution Overview

Problem

Existing financial instruments face challenges in enhancing tax, accounting, and rating agency advantages without significantly impacting other features, such as stability and efficiency.

Innovation Solution

A bond structure that combines a coupon component paying periodic coupons without principal repayment and a call option component, issued together and separable post-issue, allowing individual transfer of both components, with options for recourse and payment in cash or shares, and a bankruptcy-remote entity to manage risks.

Engineering Contradictions & Design Principles

VSEngineering Contradiction Analysis

1Adaptability or versatility

If traditional exchangeable bond structures are used, then tax and accounting advantages can be achieved, but the complexity of the instrument increases and separation of components is not allowed

Engineering Contradiction:

Improveseparability of componentsVSAvoidbond structure complexity

Core Design Contradiction:

Adaptability or versatilityVSDevice complexity

Solution Approach 1:

The bond is divided into two separable components: a coupon component that pays periodic coupons and a call option component that provides the right to convert to shares. These components can be separated and traded independently after the initial issue, allowing investors to selectively hold or transfer each component based on their investment objectives.

Inventive Principle:

Principle #1Segmentation

Solution Approach 2:

The bond structure transitions from a static, inseparable instrument to a dynamic structure that allows separation and recombination of components. The coupon component and call option component can be individually transferred, settled, or exchanged, providing flexibility and adaptability throughout the bond's life cycle.

Inventive Principle:

Principle #15Dynamics

2Ease of operation

If the bond allows separation and individual transfer of components, then investor flexibility is improved, but the complexity of management and operation increases

Engineering Contradiction:

Improveinvestor flexibilityVSAvoidmanagement complexity

Core Design Contradiction:

Ease of operationVSDevice complexity

Solution Approach 1:

By segmenting the bond into distinct coupon and call option components with separate transfer mechanisms, the system enables investors to operate each component independently according to their preferences, while the underlying framework maintains a standardized structure for issuance and management.

Inventive Principle:

Principle #1Segmentation

3Loss of energy

If the coupon component pays periodic coupons without principal repayment, then tax efficiencies are achieved, but the duration of the investment is extended

Engineering Contradiction:

Improvetax efficiencyVSAvoidinvestment duration

Core Design Contradiction:

Loss of energyVSDuration of action of moving object

Solution Approach 1:

The coupon component provides periodic coupon payments throughout the bond's life without requiring principal repayment during the term. This periodic action structure allows investors to receive tax-efficient income for an extended period, with the call option component providing a mechanism for early exit if desired.

Inventive Principle:

Principle #19Periodic action

Data Source

PatentUS7590590B2Method and system for exchangeable bundled option and no-principal debt securities

Publication Date: 2009.09.15 JPMORGAN CHASE BANK NA

AI summary

A bond comprises a coupon component that pays a periodic coupon during a first predetermined period of time until a maturity date of the coupon component without payment of any principal. The bond also comprises a call option component. The coupon and call option components are issued together in an initial issue of the bond. After the initial issue, the bond allows separation of the coupon component from the call option component and individual transfer of the coupon component and the call option component.