A Firm Has a Zero-Coupon Bond Issue Outstanding with a Face

question 26

Multiple Choice

A firm has a zero-coupon bond issue outstanding with a face value of $12 million, a current market value of $8 million, and a maturity date of 5 years. The risk-free rate of return is 4%. The equity in this firm is a:

• A) Put option with an exercise value of ($8 million)*(1.04)⁵.
• B) Put option with an exercise value of ($12 million)*(1.04)⁵.
• C) Put option with an exercise value of $8 million.
• D) Call option with a strike price of $12 million.
• E) Call option with a strike price of $8 million.

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Definitions:

Marketable

Refers to the ability of a product or service to be desired or bought by consumers due to its value, quality, or some other desirable attribute.

Differentiable

Having distinguishing characteristics that allow a product, service, or brand to stand out from its competitors.

Accessible

The quality of being easily reached, entered, used, or understood by people, including those with disabilities.

Repositioning

The act of reestablishing a product’s position in response to changes in the marketplace.