Question: Consider a 12% convertible bond that has $100 face value, 3 years to maturity, CR = 20, and pays interest annually. The market perceives that

Consider a 12% convertible bond that has $100 face value, 3 years to maturity, CR = 20, and pays interest annually. The market perceives that 3 years from now the shares of the firm are equally likely to be worth $4.50 and $7. The term structure is assumed to be flat at 10%. Assume that investors delay conversion until after they receive their last coupon. What is the fair price for this bond?

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