The Option to Abandon a Project Is a Real Option

question 13

True/False

The option to abandon a project is a real option, but a call option on a stock is not a real option.

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Definitions:

Zero-Coupon Bond

A debt security that doesn't pay interest (a coupon) but is traded at a deep discount, offering profit at maturity when the bond is redeemed for its full face value.

Duration

A measure of the sensitivity of the price of a bond or other debt instrument to changes in interest rates.

Yield To Maturity

The total return anticipated on a bond if it is held until the date it matures, including all payments of principal and interest.

Immunization

A strategy that matches durations of assets and liabilities so as to make net worth unaffected by interest rate movements.