Question 2: Convertible Bonds Consider the MSFT option prices below (prices at closing on June 4, 2023). 0 Microsoft current stock price is $335.40 0 Assume no dividends o Expiry of options December 15, 2023 (assume 190 days to expiration) Calls (EXPIRATION: 12/20/2020) PUTS (EXPIRATION 12/20/2020) Strike Price Intrinsic Implied Strike Price Intrinsic Implied value Variance Value Variance 325 $36.46 ' 325 $16.75 350 $22.04 ' 350 $23.90 Identify the above options as in-the-money and out-ofthe-money. Why are the intrinsic values different from the market prices? What is the annual implied volatility of returns of MSFT shares in the options? Explain the risk-return trade-off in a protective put and a covered call strategy, using the above options as examples. e. Using the above options, how would you create a collar on the MSFT stock? 999's Microsoft is considering issuing $10b face value of convertible bonds with 10-year maturity at a premium of 40% on the current stock price. Why do companies issue convertible bonds? What is the conversion price and conversion ratio of the bond? What is the value of the embedded call option on $1000 face value of the bond? What is the value of the straight bond component? amen} For the Yield to maturity of the straight bond component, use the YTM of the following MSF T bond currently trading (data as of 6/4/2020). Maturity Coupon Price (as of June 2, 2023) Yield 5/2/2033 2.625% $96.48 j. What is the coupon rate on a newly issued comparable straight bond with no convertibility option? k. What is the appropriate coupon rate on the convertible bond? Explain the difference in the coupon rates in (h) and (i) above. _ a