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In an options sense, a risky corporate loan is equivalent to the firm having raised riskfree debt where the debtholders have sold an insurance contract
In an options sense, a risky corporate loan is equivalent to the firm having raised riskfree debt where the debtholders have sold an insurance contract that allows the firm's owners to sell the firm's assets to the debtholders at the face value of the loan. Assume that the riskfree interest rate is 1%, while the firm's cost of debt is 3%. If the value of the firm's assets is 1,000 and the firm has a loan with a face value of 900 that matures in one year, what is the cost of this insurance contract? The cost is closest to Select one alternative: 126.2 None of the other alternatives 17.3 8.9 26.2
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