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

question 443

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:

Before-Tax Profit

The earnings of a company before income tax expense is deducted, indicating the gross profitability from operations and other activities.

Fixed Costs

Expenses that do not change with the level of goods or services produced by a business, such as rent, salaries, and loan payments.

Economy Strong

A term indicating that a country's economic performance is robust, with healthy GDP growth, low unemployment, and strong consumer spending.

Political Risk

The financial risk associated with changes in government policy, political instability, or geopolitical events that can affect the profits or assets of businesses.