Consider a 10% coupon (paid annually) convertible bond that has $10,000 face value and 4 years to maturity. The conversion

ratio is 2,000. The market perceives that 4 years from now the shares of the firm are equally likely to be worth $4 and $6. The

term structure is flat at 10%. Assume that investors delay conversion until after they receive their last coupon.

Question 1 (5 points)

Calculate the value of the equivalent straight bond.

Question 2 (5 points)

Calculate the value of the convertible bond.