The Zinn Company plans to issue $20,000,000 of 10-year bonds in March 2021 to help finance a
Question:
The Zinn Company plans to issue $20,000,000 of 10-year bonds in March 2021 to help finance a new research and development laboratory. Assume that interest rate futures maturing in March 2021 are selling for 125–145. It is now early June 2020, and the current cost of debt to the high-risk biotech company is 11%. However, the firm’s financial manager is concerned that interest rates will climb even higher in coming months.
a. Create a hedge against rising interest rates.
b. Assume that interest rates generally increase by 200 basis points. How well did your hedge perform?
c. What is a perfect hedge? Are most real-world hedges perfect? Explain.
Step by Step Answer:
Hedging Zinn Companys Bond Issuance a Create a hedge against rising interest rates Option 1 Buy Interest Rate Futures Since Zinn is concerned about ri...View the full answer
Fundamentals Of Financial Management
ISBN: 9780357517574
16th Edition
Authors: Eugene F. Brigham, Joel F. Houston
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