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Define the term "hybrid security". Discuss the different categories of hybrid securities that are in financial market
Hybrid securities are those securities which have combination of charachteristics of two or more securities. Generally the combination is of equity and debt features.
There are different types of hybrid securities which are discussed as follows -
1) Convertible bond - These type of secutities basically give an option to the holder whereby they have a power to convert these bonds into stocks of the same company they hold these bonds in. These cover the benefits of bond that is fixed payment of interest rate and eventually can be converted into stock.
2) Convertible preferred shares - these are also commonly known as convertible preference shares. Here the investors have an option to convert preference shares into equity stocks of the same company. Preference shares give them a benefit of fixed dividend and later can be converted at a price which is already fixed and is generally lower than the market price.
3) Mezzanine financing - it is an option where the lender initially gives money to the borrower as a loan and in case of non payment they can convert the loan into ownership of the company.
4) Warrants - these again give investors right to buy stocks or sell stocks at a pre determined price, these usually have a due date upto which the investor can exercise the option, after which it shall lapse.