Call Premium

### What is the primary function of a call premium in the context of a call option? - [ ] To immediately increase the stock price - [x] To provide the right to purchase a stock at a future date above the current market price - [ ] To ensure the stock price remains stable - [ ] To offer a discount on the stock price > **Explanation:** A call premium is paid to obtain the right to purchase a stock at a future date, usually at a price above the current market price. ### In bond markets, why might an issuer offer a call premium? - [ ] To attract more investors - [ ] To comply with regulatory requirements - [x] To compensate investors for early redemption - [ ] To lower the coupon rate > **Explanation:** Call premiums compensate investors when bonds are redeemed before maturity, reflecting the inconvenience and potential loss of future interest payments. ### Which factor does **not** influence the price of a call premium in the options market? - [ ] Current stock price - [ ] Time until expiration - [ ] Stock volatility - [x] Historical earnings of the company > **Explanation:** The price of a call premium is influenced by factors like the current stock price, time until expiration, and stock volatility, but not directly by the historical earnings of the company. ### What happens to the call premium if the underlying asset’s volatility increases? - [x] It increases - [ ] It decreases - [ ] It remains unchanged - [ ] It becomes null > **Explanation:** An increase in the underlying asset's volatility generally raises the call premium, as higher volatility implies a greater chance of favorable price movements. ### Why might an investor choose a call option with a higher premium but lower strike price? - [ ] To reduce market exposure - [ ] To minimize initial investment - [ ] To guarantee a purchase - [x] To increase the likelihood of exercising the option profitably > **Explanation:** Choosing a call option with a higher premium but a lower strike price may increase the chances of exercising the option profitably, as the underlying stock price needs to rise less to reach the strike price. ### What is typically included in the call premium of a bond? - [ ] Only the par value - [ ] Future interest payments - [x] Compensation above the bond's par value - [ ] The bond's maturity value alone > **Explanation:** The call premium of a bond includes compensation paid above the bond's par value, often reflecting the bond’s early redemption risk. ### When a call option expires worthless, what happens to the call premium paid? - [x] It is kept by the option writer - [ ] It is refunded to the buyer - [ ] It accrues interest - [ ] It is held in escrow > **Explanation:** If a call option expires worthless, the call premium paid is retained by the writer of the option, which is the compensation for taking on the risk of the contract. ### How is the call premium of a callable bond typically stated? - [ ] As a fixed dollar amount adjustable by the issuer - [ ] As a set number of additional payments - [x] As a fixed dollar amount or a percentage of the par value - [ ] As a percentage of the current market value > **Explanation:** The call premium of a callable bond is typically stated as a fixed dollar amount or a percentage of the par value, outlined in the bond's indenture. ### In which market condition are call options likely to carry higher premiums? - [ ] Flat market conditions - [ ] Low volatility conditions - [x] High volatility conditions - [ ] When the market is declining > **Explanation:** Call options are likely to carry higher premiums under high volatility conditions as the potential for significant price movements increases the value of the option contract. ### Which term refers to the agreed-upon price at which the underlying asset of a call option can be bought? - [x] Strike price - [ ] Par value - [ ] Market price - [ ] Expiration price > **Explanation:** The strike price is the agreed-upon price at which the underlying asset of the call option can be bought.