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Unformatted text preview: d be purchasing
an asset that will drop in value. ID12–5
A hybrid security carries some of the properties of debt and some of the properties of equity. A
determination must be made as to which properties dominate the characteristics of the security. If it is
determined that the hybrid carries mainly equity characteritists, then it should be reported in the
Stockholders’ Equity section of the Balance Sheet and should not affect the Income Statement. In either
case, the hybrid security will be treated in the Financing Activities section of the Statement of Cash Flow.
On the other hand, if the debt characteristics dominate, then the security should be classified as a liability
on the Balance Sheet and will affect the Income Statement.
c. Equity securities typically carry more risk than debt securities but consequently offer higher rates of
return. If an investor was interested in accepting more risk than offered by a debt security, but required
more of a return to justify that risk, then the investor might have an interest in a hybrid security. If the risk
profile of a pure equity security...
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