Principles of Managerial Finance, 15th Edition

17.1 Overview of Hybrids and Derivatives

1. LG1

Chapters 6 and 7 described the characteristics of the key securities—corporate bonds, common stock, and preferred stock—used by corporations to raise long-term 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 purchase warrants. Each of these hybrid securities ...