Types of Hybrid Instrument
TYPES OF HYBRID INSTRUMENT
Hybrid financial instruments are securities issued by a company that combine features of both equity and debt. Typically, they offer investors
• a fixed income for several years, and
• The opportunity to acquire equity stocks in the company, on or after a specified future date.
Straight preferred stocks also can be regarded as a form of hybrid instrument because they have characteristics that are comparable partly with those of equity stocks and partly with those of debt capital. The most common types of hybrid instrument are:
• Convertible bonds are unsecured fixed-interest bonds that give their holders the right, at some future date, to convert the bonds into equity stocks of the company, at a fixed rate of conversion. If the bonds are not converted into equity, they must be redeemed on or before maturity by the issuer. The coupon interest rate, that is fixed, is usually lower than the coupon that would have to be paid on a similar issue of straight bonds, issued at the same time and for the same maturity. This is because investors in convertibles are prepared to accept a lower interest yield in return for the option to convert the bonds into equity at a future date. One of the attractions of convertible bonds to investors is that if the share price rises sufficiently over time, there will be an opportunity to profit from converting the bonds into equity.
• Convertible preferred stocks, unlike straight preferred stocks, give their holders the right but not the obligation to convert their stockholding into equity on or after a specified date, at a fixed rate of exchange. Usually they are redeemable if not converted, and are therefore similar to convertible bonds.
• Equity warrant bonds are bonds issued with equity warrants attached. Warrants are similar to share options, and give their holder the right but not the obligation to subscribe for a fixed quantity of equity stocks in the company at a future date, and at a
Hybrid financial instruments are securities issued by a company that combine features of both equity and debt. Typically, they offer investors
• a fixed income for several years, and
• The opportunity to acquire equity stocks in the company, on or after a specified future date.
Straight preferred stocks also can be regarded as a form of hybrid instrument because they have characteristics that are comparable partly with those of equity stocks and partly with those of debt capital. The most common types of hybrid instrument are:
• Convertible bonds are unsecured fixed-interest bonds that give their holders the right, at some future date, to convert the bonds into equity stocks of the company, at a fixed rate of conversion. If the bonds are not converted into equity, they must be redeemed on or before maturity by the issuer. The coupon interest rate, that is fixed, is usually lower than the coupon that would have to be paid on a similar issue of straight bonds, issued at the same time and for the same maturity. This is because investors in convertibles are prepared to accept a lower interest yield in return for the option to convert the bonds into equity at a future date. One of the attractions of convertible bonds to investors is that if the share price rises sufficiently over time, there will be an opportunity to profit from converting the bonds into equity.
• Convertible preferred stocks, unlike straight preferred stocks, give their holders the right but not the obligation to convert their stockholding into equity on or after a specified date, at a fixed rate of exchange. Usually they are redeemable if not converted, and are therefore similar to convertible bonds.
• Equity warrant bonds are bonds issued with equity warrants attached. Warrants are similar to share options, and give their holder the right but not the obligation to subscribe for a fixed quantity of equity stocks in the company at a future date, and at a