In terms of relating options to firm value, if the stockholders have a call option on the firm, what do the bondholders have?
A) In addition to owning the firm, they have written a call option against the firm whose exercise price equals the promised payment.
B) In addition to owning the firm, they have bought a call option against the firm whose exercise price equals the promised payment.
C) In addition to owning the firm, they have written a put option against the firm whose exercise price equals the promised payment.
D) In addition to owning the firm, they have bought a put option against the firm whose exercise price equals the promised payment.

Question

Quizplus · Accepted Answer

Bondholders, in essence, have written a call option against the firm to the stockholders, where the exercise price is the promised payment or debt obligation. This means if the firm's value exceeds the debt obligation, stockholders can "exercise" their option, effectively taking control of the firm's assets beyond the debt value. Conversely, if the firm's value is less than the debt, the stockholders may choose not to exercise this "option," leaving bondholders with the firm's remaining value.

In Terms of Relating Options to Firm Value, If the Stockholders