E&F Corporation issued an annual coupon convertible bond with a coupon rate of 9% and a face value of $1,000. The bond will mature 3 years from today. The market interest rate is 12%. The conversion ratio is 12 shares. The current stock price is $100 per share.

(i) Calculate the option value of the bond if each convertible bond is trading at $1,320. (5 marks)

(ii) Explain the meaning of your answer in part (i) above.