Delta Importers has a pure discount loan with a face value of $180,000 due in one year.The assets of the firm are currently worth $265,000.The shareholders in this firm basically own a _____ option on the assets of the firm with a strike price of _____.

Question

Quizplus · Accepted Answer

Shareholders in this firm essentially own a call option on the assets of the firm, as they have the right to purchase the assets for their current value ($265,000) and sell them for the face value of the loan ($180,000) upon maturity. Therefore, the strike price is $180,000.

Delta Importers Has a Pure Discount Loan with a Face