CFAI Sample Exam 1 Q8

CFAI Answer: Debt of a company can be modeled as a long position in a risk-free bond and a short position in a put option. Which relationship shall we use here? Put-Call parity or Synthetic Cash or any others?

just relax. use simple logic. if you lend me money, and if I make periodic payments to you, its just like I issued a bond and u purchased it from me. since I can pay my debt to you anytime, thats my put option.

disagree, i think they mean that debt of company A = risk free bond (that only pays the risk free rate) + short a put on the stock of company A (that gives you the extra yield of a corporate bond, plus gives you “credit risk” because if the company has problem the stock goes down and you have a loss because you are short a put, sort of “the bond default”)

I couldn’t remember the exact question. Two scenario: 1. An investor holding Company A Debt. 2. Company A issues a debt. Really have no clue how to relate them to the CFAI answer…

You can use the put/call parity to get the answer. To me, it is the best exlanation.

to rmember it is simple. Remmeber that yield on callable > yield on gov So to get higher yield you (if you hold gov) you need to WRITE PUT. so you are long rfr bond and short put. The other way around if you ISSUED a bond

Can’t remember where this appears in the CFAI curric - can someone point me to this?