About the debt and equity of firm in view of option theory

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Reference no: EM132024262

1. Which of the following is INCORRECT about the debt and equity of a firm in view of option theory?

Equity can be viewed as a call option on the firm's asset

Bondholders effectively own a call option on a firm's asset

Common debt and equity can be viewed as options, with the firm's assets as the underlying asset.

Option pricing model can be used to price risky debt

2. Consider the following two investment alternatives. FIrst, a risky portfolio that pays 15% rate of return with a probability of 40% or 5% with a probability of 60%. Second, a Treasury bill that pays 6%. The risk permium on the risky investment is________.

Reference no: EM132024262

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