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QUESTION #1

a) What is the implied interest rate on a Treasury bond ($100,000, 6% coupon, semiannual payment with 20 years to maturity) futures contract that settled at 100'20? Round your answer to two decimal places.

%

b) If interest rates increased by 1%, what would be the contract's new value? Round your answer to the nearest cent.

$

QUESTION #2

Hedging

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 13%. 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%

Delivery Month	Open	High	Low	Settle	Change	Open Interest
(1)	(2)	(3)	(4)	(5)	(6)	(7)
Dec	94'28	95'13	94'22	95'05	+0'07	591,944
Mar	96'03	96'03	95'13	95'25	+0'08	120,353
June	95'03	95'17	95'03	95'17	+0'08	13,597

a) Use the given data to create a hedge against rising interest rates. Round your answer to the nearest whole number.The firm must sellcontract(s) to cover the planned $10,000,000 June bond issue.

b) Assume that interest rates in general increase by 100 basis points. How well did your hedge perform? (i.e., What is the net gain or loss?)Hint:Use settlement price in your evaluations. A net loss should be indicated with a minus sign. Do not round intermediate calculations. Round your answer to the nearest dollar.

On net the firm gained $.