The Value of a Bond That Has a Probability of Default

question 9

Multiple Choice

The value of a bond that has a probability of default is given by:
I. bond value = asset value - value of call option on assets
II. bond value = value of an equivalent default-free bond + value of put option on assets
III. bond value = value of an equivalent default-free bond + value of put option on the stock
IV. bond value = asset value + value of call option on the stock

• A) I only
• B) I and II only
• C) III and IV only
• D) IV only

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Definitions:

Common Stock

A type of equity security that represents ownership in a corporation, with voting rights and potential for dividends.

Preferred Stock

A class of ownership in a corporation that has a higher claim on assets and earnings than common stock, often with fixed dividends.

Common Stock

A type of equity security that represents ownership in a corporation, with rights to vote on corporate matters and receive dividends.

Consolidated Income Statement

A financial statement that summarizes the revenue, expenses, and profits of a parent company and its subsidiaries.