Question

Harry owns long-term investments in a public company. These investments pay him every year, by law, and expire ten years after the purchase date. They have an additional feature that allows a conversion ratio of 50. What does he own?

Answer 1

Answer:

Convertible Bonds

Explanation:

Convertible Bonds are debt securities which yield annual coupon rate of return, are redeemable after a period and during their life provide an option to the holder of such securities to get these converted into common stock based upon the conversion ratio.

Conversion ratio refers to the number of common stock that would be issued in return for a bond.

In the given case, Harry holds a security which provides him fixed return by law i.e obligatory for the borrower to pay him interest every year, expire after 10 years i.e period to maturity in addition to allowing him a conversion ratio of 50 i.e 50 common stocks for every bond held.

Thus, Harry owns a 10 year convertible bond.