Final answer:
Hybrid securities are financial instruments with both equity and debt features, with convertible bonds being a common example. They offer benefits to both issuers and investors, providing flexibility and the potential for higher returns while still offering security through fixed interest payments.
Step-by-step explanation:
Hybrid securities are financial instruments that possess characteristics of both equity and debt securities. An example of a hybrid security is a convertible bond, which is a bond that can be converted into a predetermined number of equity shares of the issuing company. This means that the investor gets the benefit of a fixed interest payment as with traditional bonds, but they also have the option to convert these bonds into stocks if the company performs well, thus participating in the equity upside.
Hybrid securities offer flexibility for both the issuer and the investor. For the issuer, these instruments can be less expensive in terms of interest payments compared to traditional debt. For the investor, hybrids offer a chance for higher returns if the company does well, while still providing the security of fixed interest payments.
Companies may issue hybrid securities when they want to raise capital without diluting ownership more than necessary or want to take advantage of various market conditions. Investors, in turn, may be attracted to hybrids as a means to tailor their investment strategies for risk and return.