Problem
Consider an 18-month zero-coupon bond with face value $100 that can be converted into 4 shares any time. The initial stock price is $30 with annual volatility being 30%. Assume no dividends are paid, the risk-free rate is flat at 4% per year, the hazard rate (lamda) is 3%, and the recovery rate is 30%. Use a three-step equity with default tree to compute the value of the convertible bond.