HYBRID FINANCE
Chapter notes, video classes, MCQ practice tests and quick-revision one-liners for Advanced Business and Financial Management — CAIIB.
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What is hybrid finance in the context of corporate capital structure?
Hybrid finance refers to financial instruments that combine features of both debt and equity, such as convertible debentures, preference shares, and perpetual bonds, offering characteristics of both fixed-income securities and ownership stakes.
What is the primary advantage of hybrid finance over pure debt financing?
It reduces financial distress risk while maintaining tax benefits.
How do convertible debentures function as a hybrid instrument?
Convertible debentures start as debt instruments paying fixed interest and can be converted into equity shares at a predetermined price or ratio on a specified date, blending debt security with potential equity upside.
What is a 'trigger event' in the context of contingent convertible bonds (CoCos)?
A predefined capital ratio breach that activates conversion or write-down.
What are perpetual bonds and why are they classified as hybrid instruments?
Perpetual bonds have no fixed maturity date and pay interest indefinitely; they are classified as hybrid because they behave like debt in paying coupons but resemble equity in having no obligation to repay principal.
How does hybrid finance help companies avoid equity dilution?
By using debt-like instruments that do not immediately issue new shares.
How does RBI classify Additional Tier 1 (AT1) bonds under Basel III?
RBI classifies AT1 bonds as hybrid capital instruments that qualify for Tier 1 capital, featuring loss-absorption mechanisms such as write-down or conversion to equity at the point of non-viability, making them higher-risk than senior debt.
What distinguishes participating preference shares from ordinary preference shares?
They share in surplus profits beyond the fixed dividend rate.
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