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The value of the risky debt of a firm is equal to the value of: A) a call option plus the value of a risk-free bond. B) a risk-free bond plus a put option. C) the equity of the firm minus a put. D) the equity of the firm plus a call option. E) a risk-free bond minus a put option..

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raphealnwobi

Answer:

E) a risk-free bond minus a put option

Explanation:

The value of risky debt is equal to the difference between risk free debt (risk free bond) and put option. It is given by the formula:

Value of risky debt = risk free bond - put option

Risk free debt is the value of debt assuming there would be no risk or default, has no possibility of loss while risky debt is the value of debt which is very risky allowing for default possibility.

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