On January 31, a firm learns that it will have additional funds available on May 31 It will use the funds to purchase $5,000,000 par value of the APCO 9 1 2 percent bonds maturing in about 21 years Interest is paid semiannually on March 1 and September 1 The bonds are rated A2 by Moody 's and are s...

a The spot bonds are worth 0788755000000 3943750 The futures price is 7125 The numb ...

On January 31, a firm learns that it will have additional funds available on May 31. It

Question:

On January 31, a firm learns that it will have additional funds available on May 31. It will use the funds to purchase $5,000,000 of the APCO 9 1/2 percent bonds maturing in about 21 years. Interest is paid semiannually on March 1 and September 1. The bonds are rated A2 by Moody's and are selling for 78 7/8 per 100 and yielding 12.32 percent. The modified duration is 7.81.
The firm is considering hedging the anticipated purchase with September T-bond futures. The futures price is 71 8/32. The firm believes that the futures contract is tracking the Treasury bond with a of 12 3/4 percent and maturing in about 25 years. It has determined that the implied yield on the futures contract is 11.40 percent and the modified duration of the contract is 8.32.
The firm believes that the APCO bond yield will change 1 point for every 1 -point change in the yield on the bond underlying the futures contract.
a. Determine the transaction the firm should conduct on January 31 to set up the hedge.
b. On May 31, the APCO bonds were priced at 82 3/4. The September futures price was 76 14/32. Determine the outcome of the hedge? Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a... Par Value
Par value is the face value of a bond. Par value is important for a bond or fixed-income instrument because it determines its maturity value as well as the dollar value of coupon payments. The market price of a bond may be above or below par,...