As Interest Rates Increase, the Writer of a Bond Call

question 12

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)Answers A and B only.

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Definitions:

Book Value

The net value of a company's assets as recorded on the balance sheet, deducting liabilities, indicating the shareholder equity.

Residual Value

The projected worth of an asset upon reaching the conclusion of its service period.

Straight-line Method

A depreciation method that allocates an equal amount of depreciation each year over the useful life of an asset.

MACRS

Modified Accelerated Cost Recovery System, a method of depreciation in the U.S. that allows businesses to recover investments in certain property through annual deductions.