Hybrid

A bond with a conversion feature, for example a bond convertible into common shares of the issuer, is an example of a hybrid instrument. It has two components: a financial liability (a contractual arrangement to deliver liquid assets or other financial assets) and an equity instrument (a call option granting the holder the right, for a specified period of time, to convert into common shares of the issuer). The economic effect of issuing such an instrument is substantially the same as issuing simultaneously a bond and common stock purchase warrants. A hybrid instrument that includes both a liability and an equity component, as shown in the previous example, is also often referred to as a compound instrument.