The Payoff Function of a Loan to a Debt Holder

question 93

True/False

The payoff function of a loan to a debt holder is similar to writing a call option on the value of the borrower's assets with the face value of the debt as the exercise price.

---

Definitions:

Microfinance

Microfinance encompasses financial services like loans, savings, insurance, and fund transfers targeted at low-income individuals or groups who lack access to traditional banking services.

Lending

The act of giving money to another party with the expectation that it will be repaid with interest.

Capital Flight

The sudden and large-scale withdrawal or transfer of money or assets out of a country, often in response to economic or political instability.

Debt Rescheduling

The act of negotiating new terms for the repayment of existing debts, often involving an extension of payment terms and sometimes a reduction of the interest rate.