Question 3 (a) Sharon purchases a $60,000 par value 15-year bond with 12% annual coupons bought to yield 6% convertible monthly and redemption value $60,000 will be received when the bond mature. All coupon payments are reinvested at an interest rate of 6% p.a. compounded semi-annually. (i) Calculate the bond price. [4 marks] (ii) Calculate the annual internal rate of return of her investment strategy after 15 years. [6 marks] (b) A binomial model is considered for a stock with current price of $108. Over each of the next two half-year, the stock price is expected to increase by 12% or decrease by 10%. The force of interest is 8% p.a. If the exercise price is $115 and the time to expiry is one year, find (i) the price of an American call option; and (ii) the price of an American put option. [8 marks] (c) Define the protective put strategy. [2 marks]