I have difficulties understanding the value of subordinated debt portion.

R44.P2.T6.Stulz, page 11

How does this work out as call options?

In R43.P2.T6.deservigny.pdf, it was mentioned in your video that the holders of the equity have the option to pay off all the debt(U+F), which results in them owning all the assets of the firm, thus it can be priced like a call option. Im fine with this for the equity portion

1)How does this work out for Debt? What does it mean when you have D as strike of F and SD as strike of U?

2)Value of subordinated debt = value of the firm (

Shouldnt it simply be SD = V - S - D ?

How did we even get to c(V , F ,T , t) - c(V , F - U ,T , t)

3)This is related to 2), but how is the value of senior debt

R44.P2.T6.Stulz, page 11

*V =**D*(*V*,*F*,*T*,*t*) +*SD*(*V*,*U*,*T*,*t*) +*S*(*V*,*U +**F*,*T*,*t*)How does this work out as call options?

In R43.P2.T6.deservigny.pdf, it was mentioned in your video that the holders of the equity have the option to pay off all the debt(U+F), which results in them owning all the assets of the firm, thus it can be priced like a call option. Im fine with this for the equity portion

1)How does this work out for Debt? What does it mean when you have D as strike of F and SD as strike of U?

2)Value of subordinated debt = value of the firm (

*V*) minus value of the equity minus the value of the senior debtShouldnt it simply be SD = V - S - D ?

How did we even get to c(V , F ,T , t) - c(V , F - U ,T , t)

3)This is related to 2), but how is the value of senior debt

**V -**c(V , F ,T , t). Shouldnt it simply be c(V , F ,T , t)
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