Hybrid Securities

Hybrid securities are investment tools that blend the typical features of both debt and equity securities. Also referred to as simply hybrids, these investment options create situations that allow hybrid securities to pay an identifiable return until a certain date in the maturity of the investment. After the specified date the security is very likely to change in some way. It may convert from a bond into shares of the associated underlying stock for instance. Hybrid securities are considered to be low risk investments because the investor has the opportunity to choose to keep complete control of the security until the conversion point. After this point the investor ca choose to sell the security if future projections of performance are not acceptable.

A convertible bond is a type of hybrid security. Convertible bonds typically pay fixed or floating rates for the first part of the life of the bond. With a fixed rate, the investor will know what specific return rate to expect during the first portion of the bond. With floating rates, investors can still get a good idea of just how much their return will be before the bond converts in some way. Hybrid securities such as the convertible bond undergo a change from being floating or fixed interest securities into another type of investment. This is specified when the bond is originally issued. The bond may, after the conversion date, become a straight bond. Straight bonds pay fixed or floating rates until the date of their maturity. A convertible bond may also become an option that will permit the investor to share various stock shares that are issued by the entity that originally issued the hybrid bond. The investor has the opportunity in either scenario to hold onto his or her investment or to sell that investment to another individual at the time of maturity.

Along with convertible bonds there are many other types of hybrid securities used for investment purposes today. Income securities for instance will combine the elements of stocks as well as bonds. They pay interest on the portion of the investment that is bond related while the portion that represents stocks will issue regular dividends to the individual investor. PIK or payment in kind loans are also hybrid securities. These do not require payment on the loan until the date of maturity or the financing date and may include a detachable warranty. The detachable warrant is a type of guarantee to investors that allows them to purchase shares of stock for a specified price during a specified period of time of the loan. The refinance date for instance could be used to purchase these stock shares.

There are a number of structure differences in the various different kinds of hybrid securities. Some may share a group of attributes. The price for purchasing hybrid securities is typically very low when compared to many different types of investment opportunities. Some may have a set dividend rate that may stay effective for up to five years or more. This gives investors a good idea of what to expect regarding their rate of return on the security. Investors will have the opportunity to sell their securities at lower prices if and when they choose to do so but they can also hold the security until their reset date. After this time they can decide whether selling or keeping the security and converting it would be most beneficial.

As with any investment opportunity today, there are advantages and disadvantages to hybrid securities. The key is in learning as much as possible about the specific investment type before making your initial investment. If you are planning to invest in any market it is important that you learn a bit about the specific investment type as well as various different strategies to use that could help you to see a higher return onĀ  your investment. Find a financial advisor if you are new to investing in general in order to ensure that you choose your investment type wisely.

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