25. Only for question 25! Thanks!

The following information applies to the next 2 questions: Your firm has just leased a downtown hotel to a national hotel chain. The lessee has agreed to pay your firm $10M per year for the next 20 years. You can hedge the risk of a rise in inflation (and hence a fall in the value of the lease contract) over this period by forming a short hedge with Treasury bonds (eg, go short T- Bonds). The present value of the 20-year lease contract is $98.18. Suppose the firm sells $98.18M worth of T-Bonds (8% annual coupon payment, 12 years to maturity,8% YTM) as a hedge, and then all interest rates immediately increase from 8% to 10% (new YTM=10%). The table below lays out the PV of the lease receipts and T-Bond at the starting rate, and the PV of lease receipts at the increased rate. Lease Receipts T-Bond Assets - Liabilities DA DL Value at r= 8% $98.18 $98.18 $0.000 8.14 8.04 annual coupon payment, 12 years to maturity, 8% YTM as a hedge, and then all interest rates immediately increase from 8% to 10% (new YTM=10%). The table below lays out the PV of the lease receipts and T-Bond at the starting rate, and the PV of lease receipts at the increased rate. Lease Receipts T-Bond Assets - Liabilities DA D Value at r= 8% $98.18 $98.18 $0.000 8.04 8.14 Value at r = 10% $85.14 ? ? 2 pts Question 24 What would be the loss to your firm if you did not undertake the short hedge (e.g., if you did not sell T- honds) after the interest rate increases to 10%? D Question 25 2 pts What is the net gain or loss to the firm's hedged position after rates increase to 10% (e.g., assuming the form sells T-bonds)? O $1.237M 0 $0.569M $0.340M $0.863M O $1.985M