Finance HW 8: Bonds & options
TIPS offer investors inflation protection by increasing what by the inflation each year?
Both the par value and the coupon payment
What kind of bond gives the issuer an option to retire the bond before maturity at a specific price after a specific date?
Callable
A call option on Brocklehurst Corp. has an exercise price of $30. The current stock price of Brocklehurst Corp. is $32. The call option is what?
In the money
A put option on Dr. Pepper Snapple Group, Inc., has an exercise price of $45. The current stock price is $41. The put option is what?
In the money
The maximum loss a buyer of a stock call option can suffer is what?
The call premium
The value of a listed put option on a stock is lower when what happens?
The contract approaches maturity
The potential loss for a writer of a naked call option on a stock is what?
Unlimited
A writer of a call option will want the value of the underlying asset to ___, and a buyer of a put option will want the value of the underlying asset to ___.
decrease; decrease
Consider the liquidity preference theory of the term structure of interest rates. On average, one would expect investors to require what?
A higher yield on long-term bonds than on short-term bonds
According to the liquidity preference theory of the term structure of interest rates, an increase in the yield on long-term corporate bonds vs. short-term bonds could be due to what?
An increase in expected interest rate volatility
You can be sure that a bond will sell at a premium to par when...
Its coupon rate is greater than its yield to maturity
A covered call strategy benefits from what environment?
Price stability
What strategy could be considered insurance for an investment in a portfolio of stocks?
Protective put
Everything else equal, the ___ the maturity of a bond and the ___ the coupon, the greater the sensitivity of the bond's price to interest rate changes.
longer; lower
All else the same, an American style option will be ___ valuable than a ___ European style option.
more; European- because American options have more flexibility than European options
