You Own Stock in a fiRm That Has a Pure

question 282

Multiple Choice

You own stock in a firm that has a pure discount loan due in six months. The loan has a face value of $50,000. The assets of the firm are currently worth $62,000. The stockholders in this firm
Basically own a _____ option on the assets of the firm with a strike price of:

• A) Put; $62,000.
• B) Put; $50,000.
• C) Warrant; $62,000.
• D) Call; $62,000.
• E) Call; $50,000.

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Definitions:

Yield To Call

The return a bondholder gets if the bond is held until the call date, which is before the bond's actual maturity date.

Expected Capital Gains Yield

The anticipated rate of return from an investment due to an increase in its market price.

Reinvestment Rate Risk

Occurs when a short-term debt security must be “rolled over.” If interest rates have fallen, the reinvestment of principal will be at a lower rate, with correspondingly lower interest payments and ending value.

High-Coupon Bonds

Bonds that offer a higher-than-average interest rate (coupon) compared to others in the market, reflecting potentially higher risk.