It was a busy Friday morning at work, the day after a highly anticipated ECB meeting and together with the rest of the team we were busy coming to terms with the previous day's events and discussed the trading strategy and tactical short term asset allocation.

And after being all in agreement (we're never all in agreement, we actually reach a consensus - its positive to have each other’s views challenged as it makes us stop to reason out things from a different angle), we decided to proceed on a number of tactical trades, when all of a sudden my phone rings.

Shall I answer? I knew that the trades were time sensitive so I got another colleague of mine to execute the pending trades till I answered the phone. It was one of my friends, I was sure he was going to speak to me about Liverpool's win over arch rivals Manchester United.

"Hey Mark, listen, my dad told me that he came across this bond, what do you think about it?" Here we go again I said to myself. "It seems to be good value," James added, "attractively priced, decent coupon, price is below par, its a BB rated by S&P bond issued by one of UK's leading banks. I mean what could possibly go wrong. The price seems to be hovering around the 90 level. What do you think? I've got some cash to invest and I am after your opinion."

After ensuring that the day's trades were out of the way and after digging deeper into the bond James had spoken to me earlier about, I called back to give my two cents on the matter.

"James, where did your dad find out about this bond from? It's AT1 (better known as Additional Tier 1 debt, one of the most deeply subordinated debt around)!"

"Are you sure?" he asked. "I thought it was around 90 not 81."

Before replying, I took a deep breath and was trying to figure out how to construct and word my reply without being too insensitive.

"James, I was referring to the type of bond not the price level. Additional Tier 1 Contingent Convertible debt. In terms of subordination it is one of the riskiest types around. The issuer might be a household name and seemingly too big to fail kind of bank, but this doesn't mean that it is risk less.

"This is pretty much as risky as it gets. Following stiffer banking regulations, banks are required to hold more capital than ever before in an attempt to preserve their balance sheets following the 2008 crisis and these types of bonds are replacing the old style Tier 1 bonds.

"These bonds were not designed for the retail investor. All of them are perpetual in nature, with the bank having the option to redeem the bonds at a pre-determined price and date, and bear a high coupon compared to other more senior bonds issued by the same bank, commensurate with the underlying risk.

Not all AT1 bonds have the same terms in their prospectus but all are linked in one form of another to the banks Core Equity Tier 1 ratio (CET1). One of the key features of such bonds (among many others) are that if a bank's capital adequacy ratio does not meet a predetermined criteria and level, the bonds can either be converted into equity, or partially or completely written off, known as a Debt Write down.

You need to appreciate these types of risks, and that is why the bond is trading where it is. The yield (or price) at which the bond is trading is telling you something. And this goes for all bonds in general. When you pay for a bond, you are paying for the risk of holding that security till it is ultimately redeemed. I don't think that neither you nor your dad should be looking at these types of investments. They clearly do not fit within your risk profile."

Disclaimer: This article was issued by Mark Vella, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt .The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.