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Hybrid securities pay a predictable (fixed or floating) rate of return or dividend until a certain date, at which point the holder has a number of options including converting the securities into the underlying share.
Therefore unlike a share the holder has a 'known' cash flow, and, unlike a fixed interest security, there is an option to convert to the underlying equity. More common examples include convertible and converting preference shares.
It is important to note that a hybrid security is structured differently and while the price of some securities behave more like fixed interest securities, others behave more like the underlying shares into which they convert.

Examples

• Price moves in line with share price (fixed conversion terms e.g. 1 hybrid convert to 1 share)
  


• Bond like, price does not move in line with share price (variable conversion terms, face value (usually $100) convert to $100 worth of shares).

• Cumulative: missed dividend payments are added to the next dividend payment.


• Non-cumulative: missed dividend payments are forgone.

• Redeemable: At certain times the holder may have the option to sell the securities back to the company at the face value/issue price.


• Non-redeemable: The company is not offering to buy the securities back.

Returns: Predictable dividend, often franked therefore possible tax advantage to the holder
Capital price:
Price moves in line with share price (fixed conversion terms e.g. 1 hybrid convert to 1 share) Bond like, price does not move in line with share price (variable conversion terms, face value (usually $100) convert to $100 worth of shares).
Discount: A discount is usually offered to the share price at the time of conversion.
Reset/Resettable: At the reset date the terms of the security (dividend rate, next reset date) may change. The holder can elect to accept the new reset terms or convert into shares.
Cumulative/Non-cumulative This refers to the event of missed dividend payments.
Cumulative: missed dividend payments are added to the next dividend payment.
Non-cumulative: missed dividend payments are forgone.
Redeemable/Non-redeemable
Redeemable: At certain times the holder may have the option to sell the securities back to the company at the face value/issue price.
Non-redeemable: The company is not offering to buy the securities back. Important terms
Traditional hybrids were usually structured in a way that leads the securities to react to the underlying share price. Although each has individual characteristics, typically:
Note: This fixed conversion ratio means the price of these hybrids react to the movement in the underlying share price. (The extent of the co-relation is sometimes referred to as a delta, and these typically have a delta of between 0.5 and 1) In addition, some of these securities include minimum and maximum conversion terms, effectively giving the holder a put and call option if the share price reaches a certain prices.

they have a set dividend until conversion
the conversion might occur at a number of dates
they are usually issued at a similar price to the underlying share
they convert at a set ratio. e.g. 1 hybrid converts into 1 underlying share Traditional hybrids
Most of the hybrid securities issued recently are very bond-like. Although each has individual characteristics, typically:

they have a set dividend rate for a 5 year period ('reset' period)
are issued at $100
the holder has the ability to take the new 'reset' terms, redeem the face value or convert
the holder can convert into the shares at a discount to the current ordinary share price e.g. 5%
the conversion ratio is into a dollar amount of shares. e.g. $100 worth of the underlying equity Note: This 'variable' conversion ratio means the price of these hybrids does not react to the movement in the share price, and they therefore behave in a similar way to fixed interest securities (this lack of co-relation with the underlying shares is sometime referred to as a zero delta). Latest style of hybrids
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.