Question #6
Reading: Reading 28 Credit Analysis Models
PDF File: Reading 28 Credit Analysis Models.pdf
Page: 2
Status: Correct
Correct Answer: A
Question
Under the structural model, owning equity in a company is equivalent to:
Answer Choices:
A. long position in a call option on the assets of the company
B. short position in a put option on the assets of the company
C. long position in a call option on the firm’s debt
Explanation
Equity investors have economic position equivalent to a long position in a call option on
the assets of the company with a strike price equal to the face value of debt.