Equity and debt as options

Patrick McColgan

doi:10.1002/9781118785317.weom040007

Equity and debt as options

Patrick McColgan

Accounting And Finance

Research output: Chapter in Book/Report/Conference proceeding › Entry for encyclopedia/dictionary

Abstract

This chapter explains how debt and equity contracts can be considered as options on the firm's assets. Treating interest and principal repayments on a debt instrument as the equivalent of the strike price on an option contract allows for a more detailed understanding of the payoffs to debt and equity investors conditional on future cash flows from the firm's assets. This treatment also allows for an improved understanding of the incentives of equity investors to take on financial risk by gearing up their firms in a limited liability environment for equity investors.

Original language	English
Title of host publication	Wiley Encyclopedia of Management
Subtitle of host publication	Finance
Publisher	John Wiley & Sons Inc.
ISBN (Print)	9781118785317
DOIs	https://doi.org/10.1002/9781118785317.weom040007
Publication status	Published - 21 Jan 2015

Keywords

limited liability
equity
debt
bankruptcy

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10.1002/9781118785317.weom040007

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KW - bankruptcy

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Equity and debt as options

Abstract

Keywords

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