Consider a firm viewed in terms of put options.Given this view,which one of these statements is correct?

Question

Quizplus · Accepted Answer

A put option gives the holder the right to sell an asset at a fixed price (strike price) within a specific time period. Therefore, stockholders cannot sell a put option on the firm because they already own the equity. Bondholders can write a put option on the firm and earn a premium for this option, giving them the right to sell shares of the firm at a specific price. Therefore, option D is correct; the bondholders wrote a put option on the firm to the stockholders. This means that if the value of the firm falls below a certain level, the bondholders can sell the equity back to the stockholders at the predetermined price.

Consider a Firm Viewed in Terms of Put Options