Hybrid security

A security which covers two or more than two financial products is called hybrid security. New kinds of securities are made after short intervals of time to fulfill the requirements of different types of individuals that invest in the stock or shares. The securities give a price to the investor to a specific date and an investor has many options, alternatively they may also exchange the securities. In the structure of hybrid securities two types are available: In first type the rate of securities are fixed and in the other type there is an option that the share holder or investor can exchange or convert the bonds or shares.

Examples of hybrid securities:

There are some examples of hybrid securities and Convertible bond is a good example of this. It is a kind of bond that can be changed by the owner of the bond into the shares of the company that issued it. This bond is beneficial for the company that issued the bond because in selling these bonds the interest payment is decreased. Inside a convertible bond an option of stock is available. The other example is payment in kind loans generally known as PIK loan. In this loan the investor has to buy products or bonds at a fixed rate for a specific time. The interest on this kind of bond is high.

Main points in hybrids:

There are some important points that are related to hybrid security.

Discount on the stock rate can be got when purchasing it and it can only be done by talking with the issuer at the time of purchasing stock or shares.

If the payment of the dividend is not made on time then there are two things that can happen. One is that the payments that are not made are calculated in the next payments or the payments are left behind. The first thing is called as cumulative and the other thing is known as non-cumulative.

In specific conditions, the investor can give the securities to the issuer at the same price he purchased that it. Some issuer companies give no any option to give the securities back to them. The first option is known as redeemable and the second one is known as non-redeemable.

The terms and conditions of the securities can be changed by the issuer at the date of reset but there is a choice for the share holder that he can accept the conditions or he can exchange the shares.

In some conditions the rates moves with the share rate and in some conditions the rates does not move with share rates and this is done in variable exchanging conditions.

Traditional securities:

Each hybrid security has specific characteristics.

The securities give fixed price in return till it is converted or exchanged.

The securities can be exchanged at different dates.

The securities are sold at the same rate of their underlying or hidden share.

The securities are exchange on a fixed ratio.

Recent hybrids:

Today in modern era the hybrid securities contain these characteristics:

These are issued or sold at the rate of 100 dollars.

They have a fixed rate which is given to the holder in return and it is fixed for five years.

The investor of share holder have all the options that he can exchange his securities, he can accept the conditions which are set by the issuer on the date of reset or the holder can also sold the securities to the issue back at the same rate he purchased these.

The investor can exchange the security at 5% discount rate than the present share rates.

The ratio of exchanging or converting is in amount of dollars.

Increased importance:

In 2005, new conditions and guidelines are introduced for the hybrid securities by Moody’s. These new conditions make the issuer companies able to give the securities at low interest prices and after that using the proceeds to again purchase the shares. By this the importance of the securities are increased and it gained more popularity.

Basket D security:

The widely used and the famous hybrid in the organizations like the banks is Basket D security. According to the debt-equity continuum proposed by Moody, the percentage of equity in a hybrid is 75 and the percentage of debt is 25. Some insurances of Basket D are made with which double customs can be avoided.