Macrostrategy (MS) is planning to issue convertible bonds to finance its CEO Michael Taylors gambling plan that includes multiple poker games with an initial capital of $1 billion. Company plans to issue bonds at par value of $1000 each with an option to convert bonds into stocks at maturity to make issuance attractive for investors. Current share price of MS is $50 and bonds will be issued with a 25% conversion premium and 4 years term. Bonds will pay semi-annual coupon with an annual coupon rate of 1%. MS has stock options available in the market and on the closing of 11/30/2021, option prices are listed below;

11/30/2021 Market Data (Share Price: $50)

Option Type Exercise Price Last Trade Maturity

Call $55 $3.25 05/31/2022

Call $58 $3.75 08/15/2022

Call $60 $4.10 11/15/2022

Annual risk free rate is 0.8%

1. Calculate implied volatilities of the options listed above and use the average implied volatility in your option valuation.
2. Calculate the option price with the 25% conversion premium and calculate the total value of the conversion option.
3. Calculate annual yield of convertible bond.