Hybrid Security

A hybrid security is a financial instrument that combines characteristics of both debt and equity. Common examples of hybrid securities include convertible bonds and preferred shares, which offer features like fixed interest payments (similar to bonds) and the potential for capital appreciation or conversion into common shares (similar to stocks). Hybrid securities appeal to investors seeking both income and growth potential but carry risks related to interest rates, credit, and market conditions.

Example

A convertible bond allows investors to receive fixed interest payments but also gives them the option to convert the bond into a specified number of common shares, offering the potential for capital appreciation.