Equity and debt in a firm are option-like mainly because
A) You can choose one or the other.
B) They are both non-linear securities.
C) The equity has limited liability.
D) They may be redeemed or repurchased.

Question

Quizplus · Accepted Answer

Equity is option-like because shareholders have limited liability, similar to holding a call option where the downside is limited to the premium paid (or the initial investment in equity), while the upside is potentially unlimited.

Equity and Debt in a Firm Are Option-Like Mainly Because