You can buy a $1,000 face amount five-year convertible note from Company X with a 2% coupon. The interest is paid annually. The bond is convertible into 5 shares of Xs stock and the stock currently is trading at $150 per share. Xs regular five-year borrowing cost is 3.6% per year. The following 5-year options on Xs stock are available:

$125 strike call with a price of $28.00

$125 strike put with a price of $2.00

$150 strike call with a price $15.00

$150 strike put with a price of $14.00

$200 strike call with a price $10.00

$200 strike put with a price of $55

$220 strike call with a price $3.00

$220 strike put with a price of $72

a. What is the value of the bond component of this security?

b. What is the value of the embedded option package?

c. You are offered the convertible bond at a price 96.5. Should you buy this bond? You must explain your logic.

d. Assume you buy the convertible bond today at a price of 96.5 (whether you should or should not) and convert five years later when the stock price is $220. What is your annualized return on this security?