Hurdle rate and Hybrid: Difference between pages

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A hurdle rate is an organisation's minimum rate of return used for determining the viability of a proposed investment or other project.
1.


Hybrid is a term used to describe a financial instrument which displays characteristics of both debt and equity. 


The hurdle rate can be used in two ways:
Such instruments might be designed to be an intermediate (or mezzanine) category of capital between equity and debt, or to have some of the risk absorbing characteristics of equity and, ideally, the tax efficiency of debt.


*As a target Internal rate of return, that proposals need to exceed.
These are 'hybrid' financial instruments.


*As a discount rate (r) to apply in Net present value analysis, to discount the future cash flows.


2. ''Tax''.


:<span style="color:#4B0082">'''Example 1 - Internal Rate of Return (IRR)'''</span>
The term 'hybrid' can also refer to an entity which is treated differently for tax purposes in different tax jurisdictions.


:Our organisation's hurdle rate is 7%.


:A proposal has an Internal rate of return of 5%.
3. ''Green finance - greener technology''.


:The IRR is lower than our hurdle rate.
The use - in a single system - of both traditional and greener technologies.


:Accordingly, the proposal is rejected.
For example, vehicles that can run either on electric batteries or more traditional fuels such as petrol or diesel.




4.


:<span style="color:#4B0082">'''Example 2 - Net Present Value (NPV)'''</span>
More broadly, any structure, instrument or entity with mixed, or intermediate, characteristics between two or more other, simpler or standardised structures.


:Our organisation's hurdle rate is 7%.


:We use 7% to discount a proposal's future cash flows.
:<span style="color:#4B0082">'''''Intra-day net settlement'''''</span>


:If the Net present value is less than 0, the proposal will be rejected.
:"There are two basic ways that domestic clearing systems settle:




:* end-of-period net settlement; and
:* real-time gross settlement.


Hurdle rates are usually set with reference to the organisation's weighted average cost of capital.


This will depend on a number of factors, including currency and the risk free rate of return in the relevant currency.
:A third option is a hybrid of these two: intra-day net settlement. This is practised by a number of systems, such as the US Clearing House Inter-bank Payment System (CHIPS) and the Faster Payments Scheme in the UK."


:''Payments and payment systems - the Treasurer's Wiki.''


Hurdle rates may be adjusted for different classes of project, with different levels of risk.


Riskier projects, or classes of project, would be allocated a higher hurdle rate.
The term 'hybrid' originates from horticulture and farming, where hybrid plants and animals are a biological cross between two different species or breeds.




== See also ==
== See also ==
* [[Cost of capital]]
* [[Clearing House Interbank Payment System]]
* [[Discount rate]]
* [[Convertible debt]]
* [[Internal rate of return]]
* [[Faster Payments Service]]
* [[Net present value]]
* [[Green finance]]
* [[Rate of return]]
* [[Hybrid debt]]
* [[Risk free rate of return]]
* [[Hybrid capital]]
* [[Risk premium]]
* [[Hybrid clearing and settlement systems]]
* [[Weighted average cost of capital]]
* [[Hybrid cloud]]
* [[Hybrid entity]]
* [[Hybrid mismatch arrangement]]
* [[Hybrid pension scheme]]
* [[Mezzanine]]
* [[Payments and payment systems]]
* [[Preference shares]]
* [[Settlement]]
* [[Ten Point Plan for a Green Industrial Revolution]]
* [[Warrant]]


[[Category:The_business_context]]
[[Category:Accounting,_tax_and_regulation]]
[[Category:Corporate_finance]]
[[Category:Long_term_funding]]
[[Category:Investment]]

Revision as of 21:11, 26 November 2020

1.

Hybrid is a term used to describe a financial instrument which displays characteristics of both debt and equity.

Such instruments might be designed to be an intermediate (or mezzanine) category of capital between equity and debt, or to have some of the risk absorbing characteristics of equity and, ideally, the tax efficiency of debt.

These are 'hybrid' financial instruments.


2. Tax.

The term 'hybrid' can also refer to an entity which is treated differently for tax purposes in different tax jurisdictions.


3. Green finance - greener technology.

The use - in a single system - of both traditional and greener technologies.

For example, vehicles that can run either on electric batteries or more traditional fuels such as petrol or diesel.


4.

More broadly, any structure, instrument or entity with mixed, or intermediate, characteristics between two or more other, simpler or standardised structures.


Intra-day net settlement
"There are two basic ways that domestic clearing systems settle:


  • end-of-period net settlement; and
  • real-time gross settlement.


A third option is a hybrid of these two: intra-day net settlement. This is practised by a number of systems, such as the US Clearing House Inter-bank Payment System (CHIPS) and the Faster Payments Scheme in the UK."
Payments and payment systems - the Treasurer's Wiki.


The term 'hybrid' originates from horticulture and farming, where hybrid plants and animals are a biological cross between two different species or breeds.


See also

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