Consider a One-Year, At-The-Money Call Option on Taggart Stock

question 37

Multiple Choice

Consider a one-year, at-the-money call option on Taggart stock. The effect on the price of this call option of an increase in the risk-free rate from 4% to 6% is closest to:

• A) $0.50 decrease
• B) $0.50 increase
• C) $0.70 decrease
• D) $0.80 increase

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Definitions:

Uncollectible Receivables

Accounts receivable that cannot be collected from customers, often written off as a bad debt expense.

Writing Off

The process of acknowledging that a portion of a debt or an asset has become uncollectible or worthless and removing it from the financial statements.

Income Statement

A summary of the revenue and expenses for a specific period of time, such as a month or a year.

Contra Asset

An account on a company's balance sheet that reduces the total amount of the asset accounts, often used to account for depreciation or allowances for bad debts.