You own stock in a firm that has a pure discount loan due in 6 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

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The stockholders essentially own a call option on the firm's assets with a strike price equal to the loan's face value, which is $50,000. This is because if the firm's assets are worth more than the loan amount at maturity, the stockholders can "exercise" their option by paying off the debt and keeping the company. If the assets are worth less, they can let the lender take the assets, mirroring the payoff structure of a call option.

You Own Stock in a Firm That Has a Pure