The Reuth Corporation plans to issue $20,000,000 of 10-year bonds at par next June, with semiannual interest payments. The company's current cost of debt is 11%. However, the firm's financial manager is concerned that interest rates will increase in the coming months and has decided to take a short position in U. S. government t-bond futures. See the settlement data below for t-bond futures. (Note: One standard futures contract is $100,000)

Delivery Month	Open	High	Low	Settle	Change	Open Interest
(1)	(2)	(3)	(4)	(5)	(6)	(7)
Dec	97'28	99'17	98'22	99'17	+5	387,255
Mar	98'03	98'21	97'23	98'01	+12	90,353
June	98'13	98'27	97'01	97'12	+7	9,802

a. Calculate the present value of the corporate bonds if rates increase by 2 percentage points.

b. Calculate the gain or loss on the corporate bond position.

c. Calculate the number of futures contracts required to cover the bond position. Then calculate the current value of the futures position (round up to the next whole number).

d. Calculate the implied interest rate based on the current value of the futures position.

e. Interest rates increase as expected, by 2 percentage points. Calculate the present value of the futures position based on the rate calculated above plus the 2 points.

f. Calculate the gain or loss on the futures position.

g. Calculate the overall net gain or loss.

h. Is the company hedging or speculating? Why? Which is riskier? Why?

Answer rating: 100% (QA)

a Present Value PVrate nper pmt fv PV650 20 1100000 20000000 Present Value 1779629855 It represents the percentage of par the bond is selling at It is ... View the full answer