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Hello Sir could you please explain this extract from Proteus Co.
The Black Scholes model can also be used in debt valuation. The value of a (risky)
bond issued by a company can be calculated as the value of an equivalent risk free
bond minus the value of a put option over the company’s assets.
Therefore, if the value of equity has already been calculated as a call option over the
company’s assets (as explained above), the value of debt can then be calculated using
the put call parity equation.I don’t understand this at all Sir,
I am puzzled where you have read this because the original exam question called Proteus (December 2011) has no mention of the BSOP model for valuing anything. Maybe you have found it in one of the Revision Kit (although it is not in the current edition of the BPP Revision Kit) but if so then I think they have tried to be ‘clever’ by adding something to the original question.
I will be honest with you and say that I really do not understand the paragraph you quote at all. The examiners own technical article on BSOP valuation only deals with the valuation of equity, and does not use it for the valuation of debt.
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