As Interest Rates Increase, the Writer of a Bond Call

question 47

Multiple Choice

As interest rates increase, the writer of a bond call option stands to make

• A)limited gains.
• B)limited losses.
• C)unlimited losses.
• D)unlimited gains.
• E)limited gains and limited losses.

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Definitions:

LIBOR

The London Interbank Offered Rate, previously a benchmark interest rate at which major global banks lend to one another.

Bankers' Acceptances

Short-term debt instruments issued by a company that is guaranteed by a commercial bank, commonly used in international trade.

Brokers' Calls

The interest rate charged by banks on loans extended to brokerage firms for the purpose of funding clients' margin accounts.

Residual Claimant

An individual or entity entitled to a share of a company's assets only after all debts and other obligations have been met in the event of liquidation.