If we use the Black-Scholes model for bond options, then we assume that bond prices are lognormal, as the underlying asset in the Black-Scholes model is assumed to have a lognormal distribution. Which of the following is not a consequence of this assumption?
A) Bond prices are non-negative.
B) Interest rates are non-negative.
C) Bond prices are positively skewed.
D) Interest rates are not skewed.

Question

If we use the Black-Scholes model for bond options, then we assume that bond prices are lognormal, as the underlying asset in the Black-Scholes model is assumed to have a lognormal distribution. Which of the following is not a consequence of this assumption? 
A) Bond prices are non-negative.
B) Interest rates are non-negative.
C) Bond prices are positively skewed.
D) Interest rates are not skewed.

Quizplus · Accepted Answer

The Black-Scholes model assumes that the underlying asset prices (bond prices in this case) are lognormally distributed, which implies non-negative prices and positive skewness. However, it does not directly imply anything about the distribution or skewness of interest rates.

If We Use the Black-Scholes Model for Bond Options, Then