Debt holders can be thought as owning the firm but having ________ a call option on the assets of the firm with a strike price equal to ________.
A)sold,face value of debt
B)bought,face value of debt
C)sold,value of equity
D)bought,value of equity

Question

Quizplus · Accepted Answer

Debt holders can be seen as having a call option on the assets of the firm, where the strike price is equal to the face value of the debt. This means that if the firm's assets are worth less than the face value of the debt, the debt holders will likely exercise their call option and demand payment, potentially leading to bankruptcy for the firm. Therefore, the correct answer is A, as debt holders have the option to "sell" (i.e. exercise their call option) their debt back to the firm at face value.

Debt Holders Can Be Thought as Owning the Firm but Having