Which of the Following Statements Is FALSE

question 24

Multiple Choice

Which of the following statements is FALSE?

• A)If the value of the firm's assets exceeds the required debt payment,debt holders are fully repaid.
• B)Another way to view corporate debt: as a portfolio of riskless debt and a short position in a call option on the firm's assets with a strike price equal to the required debt payment.
• C)Viewing debt as an option portfolio is useful as it provides insight into how credit spreads for risky debt are determined.
• D)You can think of the debt holders as owning the firm and having sold a call option with a strike price equal to the required debt payment.

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Definitions:

Duration

Duration measures a bond's sensitivity to interest rate changes, representing the weighted average time until a bond's cash flows are paid to the investor.

Annual Pay

The total monetary compensation an employee receives from their employer in a one-year period, including all forms of salary, bonuses, and other financial benefits.

Asset Portfolios

Collections of various types of investments held by individuals or institutions to diversify risk and achieve financial goals.

Duration

A measure of the sensitivity of the price of a bond or other debt instrument to changes in interest rates, expressed in years.