Which of the following securities is referred to as hybrid security?

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Question: Which of the following securities is referred to as hybrid security?

Option a: Commercial papers. These are short-term debt instruments issued by corporations to meet immediate funding needs. They are pure money market debt instruments, with no equity-like features, so they are not hybrid securities.

Option b: Preference shares. This is the hallmark hybrid security in many definitions. Preference shares typically combine features of equity (ownership in the company) with features of debt (fixed or preferential dividend, priority over ordinary shares in dividend payments and liquidation). The fixed dividend and seniority in payments resemble debt, while ownership and potential for capital appreciation at times reflect equity characteristics, hence the hybrid nature.

Option c: Bonds. Bonds are classic debt securities issued by entities (corporations, governments) to borrow money. They have fixed interest payments and principal repayment but do not carry equity-like features such as dividends or voting rights, so they are not hybrid.

Option d: Ordinary shares. Ordinary (common) shares represent pure equity ownership with dividends variable and no guaranteed payments, plus voting rights. They lack the debt-like features that define a hybrid security, so they are not hybrid.

In summary, the combination of fixed-income-like features with equity-like residual characteristics in preference shares is what earns them the label of a hybrid security, making option b the correct choice.

Which of the following securities is referred to as hybrid security?

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