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 ________
A)put; $62,000.
B)put; $50,000.
C)warrant; $62,000.
D)call; $62,000.
E)call; $50,000.

Question

Quizplus · Accepted Answer

Stockholders in a firm with a pure discount loan have a call option on the assets of the firm with a strike price equal to the face value of the loan. In this case, the face value of the loan is $50,000, so stockholders own a call option with a strike price of $50,000. The value of the underlying assets is $62,000, but this information is not relevant to the type of option owned by shareholders. Therefore, the correct answer is (E) call; $50,000.

You Own Stock in a Firm That Has a Pure