Bond Bond 7 Bond 8 Coupon One-year Libor annually, set in arrears, capped at 5.00% One-year Libor annually, set in arrears, floored at 3.50% To value Varlep's bonds, Hsu constructs the binomial interest rate tree provided in Exhibit 6. Chapter 9 Valuation and Analysis of Bonds with Embedded Options EXHIBIT 6 Binomial Interest Rate Tree Used to Value Varlep's Bonds Year 0 Year 1 Year 2 6.3679% 4.5027% 3.0000% 5.0092% 3.5419% 3.9404% 499 Last, Hsu selects the two bonds issued by Whorton, Inc. given in Exhibit 7. These bonds are close to their maturity date and are identical, except that Bond 9 includes a conversion option. Whorton's common stock is currently trading at $30 per share. EXHIBIT 7 Bonds Issued by Whorton, Inc. Bond Bond 9 Bond 10 Type of Bond Convertible bond with a conversion price of $50 Identical to Bond 9 except that it does not include a conversion option