You are an analyst at FixInc Corp. whose task is to value a convertible bond of Allana Corp. that matures in 4 years. The bond has face value of $1000, annual coupon rate of 8% and pays coupons semi-annually. Current interest rate for bonds of similar credit risk and maturity is 7% per annum. Current volatility estimate (sigma) for Allana Inc.s stock return is 25% per annum, dividend yield is 2% per annum and current stock price is $30 per share.

(a) Calculate straight bond value for the bond described above. Assume discrete compounding.

(b) Calculate Black-Scholes value of conversion option for this bond assuming that the conversion ratio is 20 shares per 1 bond and the conversion price equals $50. Furthermore, assume that the time to maturity of this option equals bonds time to maturity and the risk free rate is 4% per annum with continuous compounding.

(c) What is the total value of this convertible bond?