What is a compound or hybrid financial instrument? Provide an example

Economics Dec 13, 2020

What is a compound or hybrid financial instrument? Provide an example.

Expert Solution

A compound/hybrid financial instrument is one that has characteristics of both a debt and an equity instrument, hence the use of the term "hybrid".

A common example of a compound/hybrid financial instrument is convertible debt. This is debt since there is a contract to service and repay a principal amount lent to the company, but there is also the right for the debtholder to convert this debt into shares of the company, thus including a built-in stock option (i.e. an equity component).

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