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| *Ostroff, Fair and Company>>>Financial Services |
What is hybrid financial instrument? discuss its main feature&advantages.? |
What is hybrid financial instrument? discuss its main feature&advantages.? Basicly, a hybrid financial insturment is an investment that blends chearacteristics of both equity and debt markets (stocks and bonds). The most common form of a hybrid insturment is the convertible bond. This type of security is an issuance of debt that can be converted to a company's common stock at any given time. So, it is kind of like a call option. Obviously, the major advantage of this type of security is that if the corporations stock price goes down, the option will not be exercised and you will still receive interest payments on your bonds. However, if the stock price goes up, you can convert the bonds to stock at a given strike price. If the price of the stock is above the strike price, the convertible is considered in " in the money." The major advantage here is security. There is opportunity to profit greatly on increases in stock prices, but at worse case you will still hold the debt security. The only way you can realize "real" losses is if the corporation defaults on its debt. One disadvantage of a convertible is a low yield. Convertibles often yield a lower interest rate than the corporations no convertible bonds due. One important thing to point out when dealing with hybrid securities is they are very difficult to accuratly value, and this misreresentation is often reflected in its market value. This leaves alot of opportunity for an arbitrage situation, where a securtiy can be purchased then immediatly sold for a profit simultaniously. There are other types of hybrid insturments including prefred stock, trust prefered securities, and equity default swaps. however, convertible debt is the most commonly used security to the individual investor. i Hope this helps. If you are wondering about anything else let me know. |
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