I.You have collected following information about the firm XYZ (40 points): The firm issues a straight corporate bond: par value = $250, annual coupon = $40 (paid once a year), maturity = 2 years.The current total value of the firm (including equity and the debt) = $400.The firms future values fo llow a two-state path with up state growth multiple u = 1.40 and down state growth multiple d = 0.7143 each year.The annual risk-free rate = 2%.Assume annual compounding and annual coupon payment.(a)Calculate the price of the straight corporate bond. (10 points)(b)Support the firm instead issues a convertible corporate bond that allows investors to convert it into 40% of the firms total asset value. Calculate the price of the convertible bond. Which bond, the straight bond or the convertible bond, has a higher price and why? (10 points) (c)There is a Treasury bond with the par value of $250, the annual coupon of $40, and the maturit y of 2 years. Suppose the term structure of annual spot rates is flat at 2%. What is the price of the Treasury bond? Which one, the Treasury bond or the corporate bond, has a higher price and why? (7 points)(d)Calculate the credit spread for the straight corporate bond (5 points). (e)Suppose the volatility of the firm value decreases, i.e., u=1.20 and d=0.8333. Calculate the credit spread of the straight corporate bond. Is it higher, lower, or the same as that for the case u=1.40 and d=0.7143 and why? (8 points)

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