A financial security that has the characteristics of debt and equity. A classic example of hybrids (hybrid securities) is the preferred stock (preference stock) that constitutes an ownership stake in a company/ a business (i.e., the equity component) but also provides fixed payments (which is the debt component that makes it bond-like).
Hybrids (hybrid securities) 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.
The main types (examples) of hybrid financial securities include:
For instance, a capital note is a form of security that is used in structured finance, combining the features of debt and equity (both bonds and shares). A capital note can also be either an equity security or a debt security, depending on the core underlying component. In all meanings, the designation “capital” implies that the security ranks relatively low/ junior in the issuer’s order of priorities in claims for its net assets.
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