Preferred stock is often seen as a hybrid security as it has characteristics of both debt and equity. The Wall Street Journal once reported two new securities used by companies going public: income deposited securities and enhances income securities, both of which carry characteristics of both debt and equity. The securities are sold to investors, who will receive two payments from the company-one based on the company’s equity shares and one based on the company’s outstanding debt. The securities are being underwritten and marketed by such investment banking firms as Canadian Imperial Bank of Commerce, Goldman Sachs, and Lehman Brothers.
(a) What is a hybrid security, and how should it be reflected on the balance sheet, income statement, statement of cash flows, and statement of shareholders’ equity?
(b) Describe some reason why an investor might want to purchase a hybrid security and some reasons why a company might want issue a hybrid security and some reasons why a company might want to issue a hybrid security.
(c) What are some characteristics that would make these securities look more like debt? More like equity?