In Terms of Relating Options to Firm Value, If the Stockholders

question 25

Multiple Choice

In terms of relating options to firm value, if the stockholders have a call option on the firm, what do the bondholders have?

• A) In addition to owning the firm, they have written a call option against the firm whose exercise price equals the promised payment.
• B) In addition to owning the firm, they have bought a call option against the firm whose exercise price equals the promised payment.
• C) In addition to owning the firm, they have written a put option against the firm whose exercise price equals the promised payment.
• D) In addition to owning the firm, they have bought a put option against the firm whose exercise price equals the promised payment.

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Definitions:

Elastic Demand

A market condition where the quantity demanded of a product changes significantly in response to price changes.

Inelastic Demand

A market situation where the quantity demanded of a product does not change significantly when its price varies.

Price Elasticity

A measure of how much the demand for a product changes in response to a change in its price.

Demand

The total quantity of a product or service that consumers are willing and able to purchase at a given price.