A debt instrument (bond) that combines the features of debt and equity. In other words, it is typically located in between debt and equity. Practically, a hybrid bond is a debenture whereby an issuer can obtain credit for a specific period of time. A bondholder will be compensated by interest payments. Hybrid bonds have a long term maturity usually exceeding 30 years. Most of them, however, are perpetual, i.e., don’t have maturities. The long-term maturity or perpetual life help ensure that the equity contributed by the investor remains in the issuing company. The issuer of a hybrid bond has the option to defer coupon payment.

Hybrid bonds are only junior to stock. That is, holders of hybrid bonds come next to all other creditors of the company when it comes to claims. This subordination indicates the equity characteristics associated with this type of debt instruments.