Start with the partial model in the file Ch23 P06 Build a Model.xls on the textbook’s Web site. Use the information and data from Problem 23-5.

a. Create a hedge with the futures contract for Zinn Company’s planned June debt offering of $10 million. What is the implied yield on the bond underlying the futures contract?
b. Suppose that interest rates fall by 300 basis points. What are the dollar savings from issuing the debt at the new interest rate? What is the dollar change in value of the futures position? What is the total dollar value change of the hedged position?
c. Create a graph showing the effectiveness of the hedge if the change in interest rates, in basis points, is −300, −200, −100, 0, 100, 200, or 300. Show the dollar cost (or savings) from issuing the debt at the new interest rates, the dollar change in value of the futures position, and the total dollar value change.

Data From Problem 23-5:

The Zinn Company plans to issue $10,000,000 of 20-year bonds in June to help finance a new research and development laboratory. The bonds will pay interest semiannually. It is now November, 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. The following data are available:

Futures Prices: Treasury Bonds—$100,000; Pts. 32nds of 100%