What is a hybrid security?
It's a type of security that combines elements of the two broader groups of securities - debt and equity. Hybrid securities pay a predictable rate of return or dividend until a specified date, following which the holder has various options including converting the securities into the underlying share.
Where have you heard about hybrid securities?
Hybrid securities have soared in popularity since Moody's published a new set of guidelines for treating debt-equity hybrids in 2005. The guidelines established a 'debt-equity continuum' and enabled institutions to classify part of the hybrid as equity and part as debt.
What you need to know about hybrid securities.
Hybrid securities are bought and sold on an exchange through a brokerage. Some hybrids return their face value to the holder when they mature, while others have tax advantages.
The most common type of hybrid security is a convertible bond that has features of an ordinary bond but is strongly influenced by price movements of the underlying stock.
Convertible preference shares are another popular form of hybrid security - they pay dividends at a fixed or floating rate before common stock dividends are paid, and can be exchanged for shares of the underlying company's stock.