As interest rates increase, the buyer of a bond put option stands to
A)make limited gains.
B)incur limited losses.
C)incur unlimited losses.
D)lose the entire premium amount.
E)make limited gains and lose the entire premium amount.

Question

Quizplus · Accepted Answer

When interest rates increase, the value of existing bonds typically decreases, making a bond put option (the option to sell a bond at a predetermined price) more valuable. Therefore, the buyer of a bond put option stands to make limited gains, as the profit is capped at the difference between the strike price of the option and the lower market price of the bond, minus the cost of the option premium.

As Interest Rates Increase, the Buyer of a Bond Put