Unformatted text preview: ck options. W 673 674 PART 6 LG1 Special Topics in Managerial Finance 16.1 An Overview of Hybrids and Derivatives hybrid security
A form of debt or equity financing
that possesses characteristics of
both debt and equity financing.
A security that is neither debt nor
equity but derives its value from
an underlying asset that is often
another security; called ”derivatives,” for short. Chapters 6 and 7 described the characteristics of the key securities—corporate
bonds, common stock, and preferred stock—used by corporations to raise longterm funds. In their simplest form, bonds are pure debt and common stock is pure
equity. Preferred stock, on the other hand, is a form of equity that promises to pay
fixed periodic dividends that are similar to the fixed contractual interest payments
on bonds. Because it blends the characteristics of both debt (a fixed dividend payment) and equity (ownership), preferred stock is considered a hybrid security.
Other popular hybrid securities include financial leases, convertible securities,
and stock purc...
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