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Why Equity holders in effect hold a call option on a corporation’s assets and debt holders can be considered to have written the option?
Because if the company does better then the equity (shareholders gain) but not the debt lenders. However if the company fails, then the amount that the shareholders can lose is limited to their capital in the company.
As far as the debt is concerned, then they do not gain if the company does better. If the company fails, then they have first call on whatever is left in the business.
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