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Securities

Securities Bond Equities Investment Fund Derivatives Structured finance Agency Securities

Markets Bond market Stock market Futures market Foreign exchange market Commodity market Spot market Over-the-counter Market (OTC)

Bonds by coupon Fixed rate bond Floating rate note Zero coupon bond Inflation-indexed bond Commercial paper Perpetual bond

Bonds by issuer Corporate bond Government bond Municipal bond Sovereign bond

Equities (Stocks) Stock Share IPO Short Selling

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Structured Finance Securitization Asset-backed security Collateralized debt obligation Collateralized mortgage obligation Credit linked note Mortgage-backed security Unsecured bond Agency Securities

Derivatives Options Warrants Futures Forwards Swaps Credit Derivatives Hybrid Securities

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A hybrid security, often referred to as "hybrids", is a security that combines elements of two securities, such as debt and equity.

• A convertible bond is a bond (i.e. a loan by the issuer), but can be exchanged into shares. A convertible can be valued as a combination of a straight bond and an option to purchase the company's stock.

• An income security is a hybrid between a stock and a bond. The bond portion pays interest, and the stock portion pays dividends. Income securities are popular in Canada.

Hybrid securities have skyrocketed in popularity since Moody's released a new set of guidelines for treating debt-equity hybrids in February 2005.

The new guidelines establish a "debt-equity continuum" and allow institutions to classify part of the hybrid security as equity and part as debt (in a shift from the previous policy, that counted the entire amount as debt). This change allowed companies to issue hybrid securities at a time of record low interest rates (and thus gain access to cheap capital) and then use the proceeds to repurchase equity shares (which have a very high cost of capital). Since only a fraction of the recapitalization would be listed as debt on the balance sheet, hybrids allowed companies to repurchase more shares than previously without negatively affecting their credit rating.

The most popular hybrid among financial institutions (banks and insurance companies) is the Basket D security. Basket D is a reference to a point on Moody's debt-equity continuum scale that treats the hybrid as 75% equity and 25% debt. In order to qualify, the security must give the issuer the right (or even the obligation) to roll-over the security at expiry to an indefinite or long maturity bond and to suspend dividends (effectively coupon payments, but to reflect the equity nature of the security, the term "dividend" is used). Most Basket D issuances have been structured in a way that also preserves the tax deductible nature of their interest payments, avoiding double taxation/customs.

• Moody's homepage