Hybrid Security

Hybrid securities are those set of securities that combine characteristics of two or more types of
securities, usually both debt and equity components. A form of debt or equity financing that processes
characteristics of both debt and equity financing .These securities allows companies and banks to
borrow money from investors and facilitate a different mechanism from the traditional bond or stock
offering. These securities are generally bought or sold via an exchange or through a broker.

Uses of Hybrid Security

Hybrid securities are investment instruments that combine the features of pure equities and pure
bonds. These securities tend to offer a higher return than pure fixed income securities such as bonds
but a lower return than pure variable income securities such as equities. They are considered less risky
than pure variable income securities such as equities but more risky than pure fixed income securities.

Definition of Lease
A “lease” is defined as a contract between a lessee and a lessor for the hire of a specific asset for a
specific period on payment of specified rentals.

Lessee & Lessor: The receiver of the services of the assets under a lease contract called the lessee and
the owner of the assets that are being leased called the lessor.
Types of leases
The Finance Lease and Operating Lease is the very common form of lease agreements that an
individual goes for. The lease is an agreement wherein the lessor grant rights to the lessee to use lessor
property in exchange for certain periodic payments.

Capital Lease: This is also called ‘financial lease’. A capital lease is a long-term arrangement which
is non-cancelable. The lessee is obligated to pay lease rent till the expiry of lease period. The period of
lease agreement generally corresponds to the useful life of the asset concern. A long-term lease in
which the lessee must record the leased item as an asset on his/her balance sheet and record the present
value of the lease payments as debt. Additionally, the lessor must record the lease as a sale on his/her
own balance sheet. A capital lease may last for several years and is not cancelable. It is treated as a
sale for tax purposes.

Operating Lease: Contrary to capital lease, the period of operating lease is shorter and it is often
concealable at the option of lessee with prior notice. Hence, operating lease is also called as an ‘Open
end Lease Arrangement.’ The lease term is shorter than the economic life of the asset. Thus, the lessor
does not recover its investment during the first lease period. Some of the examples of operating lease
are leasing of copying machines, certain computer hardware, world processors, automobiles, etc.
Operating lease is short-term and cancelable by the lessee. It is also called as an ‘Open end Lease
Agreement’. In case of a financial lease, the risk of equipment obsolescence is shifted to the lessee
rather than on the lessor. The reason is that it is a long-term and non-cancelable agreement or contract.
Hence, lessee is required to make rental payments even after obsolescence of equipment. On the other
hand, it is said that in operating lease, the risk of loss shifts from lessee to lessor. This reasoning is not
correct because if the lessor is concerned about the possible obsolescence, he will certainly
compensate for this risk by charging higher lease rentals. As a matter of fact, it is more or less a ‘war
of wits’ only.
Leasing Arrangements Techniques
 Direct lease: Direct lease refers to a contractual arrangement between a lessor and a lessee
where the lessor leases out some property (generally equipment) to the lessee. There are two
types of contract that come under direct lease. The first is the bipartite agreement where the
lessor already owns the property and directly leases it out to the lessee. The second is a
tripartite agreement where the lessor, usually a bank or a lending institution.
 Sale-lease Back arrangement: A leaseback is an arrangement in which the company that sells
an asset can lease back that same asset from the purchaser. With a leaseback—also called a
sale-leaseback—the details of the arrangement, such as the lease payments and lease duration,
are made immediately after the sale of the asset.
 Leveraged lease: A leveraged lease is a lease agreement that is financed through the lessor
with help from a third-party financial institution. In a leveraged lease, an asset is rented with
borrowed funds.

Lease versus Purchase Decision