Beta Corp wants to issue $5,000,000 of 20-year bonds in September 2014, which is currently 3 months away. Their current cost of debt today is 7% and they are concerned rates will go up in the next 3 months. Create hedge against rising interest rates (Write out what the hedge would be) and show how it will payoff if rates increase by 2%. What will be the ending value of the hedge and loan proceeds assuming Beta Corp. makes the current 7% bond payments on the $5,000,000 loan when rates increase by 2%?

Assume that all bonds are semi-annual coupon bonds. Note that treasury futures are based upon a 6% hypothetical coupon and each future contract trades at a stated percentage of par value.

Currently 20-year treasury futures maturing in September 2014 trade at 118.5% of par value