Answer:
E) a risk-free bond minus a put option
Explanation:
The value of risky debt is equal to the difference between risk free debt (risk free bond) and put option. It is given by the formula:
Value of risky debt = risk free bond - put option
Risk free debt is the value of debt assuming there would be no risk or default, has no possibility of loss while risky debt is the value of debt which is very risky allowing for default possibility.
