Branger Ltd. has the choice of issuing floating-rate debt at LIBOR + 1% fixed-rate debt at 6%. Likewise, Creeson Plastics can issue floating-rate debt at LIBOR + 2.5% or fixed-rate debt at 7.7%. Suppose Branger issues fixed-rate debt and Creeson issues floating-rate debt. The two companies are considering a swap where Branger will make LIBOR payments to Creeson in exchange for a fixed-rate payment of 5.1%. What are the net payments of Branger and Creeson if they engage in the swap? Is it better for Branger to issue fixed-rate debt and enter into the swap or to issue floating-rate debt? Is it better for Creeson to issue floating-rate debt and to enter into the swap or issue fixed-rate debt? What decision would each company make if the fixed-rate payment on the swap was 5.5%?

20-5.Zinn Company plans to issue $10,000,000 of 10-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 9%. 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: Government of Canada Bonds_$100, 000; Price in %

Delivery Month	Price
Dec	102.16
Mar	102.78
June	102.53

a. Use the given data to create a hedge against rising interest rates.

b. Assume that interest rates in general increase by 200 basis points. How well did your hedge perform?

c. What is a perfect hedge? Are most real-world hedges perfect? Explain.