Debt holders can be thought as owning the firm but having ________ a call option on the assets of the firm with a strike price equal to ________.
A)sold,face value of debt
B)bought,face value of debt
C)sold,value of equity
D)bought,value of equity
E)bought,market value of debt

Question

Quizplus · Accepted Answer

Debt holders have the right to claim the face value of the debt at maturity. This can be thought of as a call option with a strike price equal to the face value of the debt, as they have the option to exercise their right to claim the assets of the firm at that price. Therefore, the correct choice is (A) sold, face value of debt.

Debt Holders Can Be Thought as Owning the Firm but Having