A financial instrument that combines multiple elements or components of different, distinguishing features, particularly debt-type (debt instrument) and equity-type (equity instrument) together in the same structure. A hybrid financial instrument could be either a debt instrument (e.g., a bond) with equity features or a share with debt characteristics. In other words, such an instrument contains an embedded instrument whose financial effect needs to be bifurcated (by means of bifurcation), though in its very nature, it is a mixed form of two distinct components or more, and cannot be split into its building blocks. The hybrid elements give rise to mismatches related to recognition and measurement across different countries.

In general, hybrid financial instruments provide better combinations of risk-return tradeoff, but potential, higher returns are associated with higher degrees of risk due to the equity risk that arises from the equity component.

In concept, hybrid financial instruments are a type of mezzanine financing/ mezzanine capital.