A financial instrument that combines the characteristics of both equity and debt (or both equity instruments and debt instruments). A typical hybrid (hybrid instrument) is the convertible bond, which involves an issuance of debt that is convertible to an issuer’s common share at a specific time in the future. By nature, hybrids have higher rates of return relative to debt instruments, but for a higher deal of risk, represented in the equity component risk. An issuer of hybrids expects better value and enhanced liquidity thanks to the blended features of such instruments.
Hybrids provide for higher financial leverage and better investment capacity, but at the expense of complexity of structure and the need to factor in multiple considerations including legal, economic, and financial aspects.
Other prominent examples of hybrid financial instruments include profit participation loans, warrant-linked bonds, subordinated loans, profit participation rights, and silent partnership.
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