You own stock in a ﬁrm that has a pure discount loan due in six months. The loan has a face value of $50,000. The assets of the ﬁrm are currently worth $62,000. The stockholders in this ﬁrm
Basically own a _____ option on the assets of the ﬁrm with a strike price of:

Question

Quizplus · Accepted Answer

Stockholders own a call option on the firm's assets with a strike price equal to the face value of the debt, which is $50,000. If the firm's assets exceed this value, stockholders benefit from the residual value.

You Own Stock in a ﬁRm That Has a Pure