A Corporate Security Can Be Viewed as a Contingent Claim

question 33

Multiple Choice

A corporate security can be viewed as a contingent claim on the firm. This means that:

• A) debt holders will receive their payoff from the firm based on their fixed claim or the firm cash flows if less than the fixed claim.
• B) debt holders will receive the maximum of the firm cash flows or the fixed claim.
• C) no payoff will be made unless the firms makes more than the fixed claim of the debt.
• D) no debt payoff will be made if there is an equity payoff.

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Definitions:

National Debt

The total amount of money that a country's government has borrowed.

Taxes

Mandatory economic impositions or alternative kinds of charges placed on taxpayers by governmental bodies to finance state expenditure and diverse public costs.

Real GDP

The measure of the value of all goods and services produced within a country over a specified period of time, adjusted for inflation.

Government Purchases

All goods and services bought by the federal, state, and local governments.