Zero-coupon debt value rises when, ceteris paribus
A) The firm's assets rise in value.
B) The volatility of the firm's assets declines.
C) The maturity of the debt declines.
D) All of the above.

Question

Quizplus · Accepted Answer

Zero-coupon debt value increases when the firm's assets rise in value because the likelihood of repayment increases. It also rises when the volatility of the firm's assets declines, as lower volatility means less risk of the firm's value dropping below the debt value. Additionally, as the maturity of the debt declines, the time horizon for potential default decreases, thus increasing the debt's value.

Zero-Coupon Debt Value Rises When, Ceteris Paribus