Consider an 18-month zero-coupon bond with a face value of $100 that can be converted into five

Question:

Consider an 18-month zero-coupon bond with a face value of $100 that can be converted into five shares of the company's stock at any time during its life. Suppose that the current share price is $20, no dividends are paid on the stock, the risk-free rate for all maturities is 6% per annum with continuous compounding, and the share price volatility is 25% per annum. Assume that the hazard rate is 3% per year and the recovery rate is 35%. The bond is callable at $110. Use a three-time-step tree to calculate the value of the bond. What is the value of the conversion option (net of the issuer's call option)?

Face Value
Face value is a financial term used to describe the nominal or dollar value of a security, as stated by its issuer. For stocks, the face value is the original cost of the stock, as listed on the certificate. For bonds, it is the amount paid to the...