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

Question

BlackTom AI · Accepted Answer

First, we clarify what a hybrid security means in finance: a security that blends features of both debt and equity, offering characteristics such as fixed income-like payments or priority in claims (debt traits) while also providing an ownership or residual claim (equity traits).
Option a: Commercial papers are short-term unsecured promissory notes issued by corporations. They function primarily as debt instruments with fixed maturity and interest, and they do not combine equity features, so they are not hybrids.
Option b: Bonds are classic debt instruments that promise regular interest payments and return of principal at maturity. While they are debt-based, they do not typically carry equity-like features (such as ownership or potential-for-dividend type rights), so they are not hybrid securities.
Option c: Preference shares (preferred stock) are commonly cited as hybrid securities because they have fixed dividend payments like debt and a higher claim on assets than ordinary shares in case of liquidation, while also representing equity ownership. This combination of debt-like income and equity-like residual claims fits the hybrid definition well.
Option d: Ordinary shares (common stock) represent pure equity with variable dividends (if any) and residual claims on assets after debt and preferred shareholders. They do not carry debt-like fixed payments or priority features, so they are not hybrid securities.
In summary, the unique blend of debt-like and equity-like characteristics is most accurately associated with preference shares, aligning with the concept of a hybrid security.

MCD2170 - T2 - 2025 Week 7 Post class homework

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

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