6 . All else being equal, a rise in interest rates will most likely result in the value of the option embedded in Bond 3: A . decreasing. B . remaining unchanged. C . increasing.

7 . All else being equal, if Ferguson assumes an interest rate volatility of 15% instead of 10%, the bond that would most likely increase in value is: A . Bond 1. B . Bond 2. C . Bond 3.

Samuel \& Sons is a fixed-income specialty firm that offers advisory services to investment management companies. On 1 October 20X0, Steele Ferguson, a senior analyst at Samuel, is reviewing three fixed-rate bonds issued by a local firm, Pro Star, Inc. The three bonds, whose characteristics are given in Exhibit 1 , carry the highest credit rating. FXHIRIT I Fixad-Rare Ronda Isaned hv Pro. Srar. Inc The one-year, two-year, and threc-year par rates are 2.250%,2.750%, and 3.100%, respectively. Based on an estimated interest rate volatility of 10%, Ferguson constructs the binomial interest rate tree shown in Exhibit 2. On 19 October 20X0, Ferguson analyzes the convertible bond issued by Pro Star given in Exhibit 3. That day, the option-free value of Pro Star's convertible bond is $1,060 and Pro Star's stock price is $37.50