Which of the following securities is considered a hybrid security?

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Question: Which of the following securities is considered a hybrid security?

Option 1: common stock. This is a pure equity security representing ownership in a company and typically carries voting rights and residual claims on assets. It does not combine debt-like features, so it is not a hybrid security.

Option 2: preferred stock. This security often has characteristics of both equity and debt: it provides fixed or cumulative dividends like debt obligations and priority over common stock in dividends and liquidation, while still being an equity instrument with potential upside. These mixed features fit the definition of a hybrid security.

Option 3: bond. Bonds are classic debt instruments where the issuer promises to pay periodic interest and repay principal at maturity. They are not equity, and their primary characteristics are debt-like, so they are not hybrids.

Option 4: annuity. An annuity is a financial product designed to provide a stream of payments, typically during retirement. It is not a security issued by a corporation or government and does not embody a mix of debt and equity features, so it is not a hybrid security.

Option 5: none of these. Since one of the options (preferred stock) does exhibit hybrid characteristics, this statement is incorrect.

Overall, the reasoning shows that the security combining fixed-income-like features with equity-like rights is preferred stock, which is why it is considered a hybrid security.

MSB-250-300-002 Topic 7 Quiz

Which of the following securities is considered a hybrid security?

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