A corporation plans to issue long-term bonds two months from now. To protect itself against a rise in interest rates, the corporation can buy put options. If interest rates rise, the interest cost of the bonds issued two months from now will be ________, but the put option will have ________ in value.

Question

Quizplus · Accepted Answer

To protect against a rise in interest rates, buying put options on interest rates would mean that if interest rates rise, the cost of issuing bonds (interest cost) would indeed be higher. However, the value of the put options would increase because they would become more valuable as they allow the holder to sell at the now higher interest rate.

A Corporation Plans to Issue Long-Term Bonds Two Months from Now