Finance 5880. See attachment..................................

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Nam e______________________________________ Final Examination FINC 5880 Session 9 Question 4. (20 point s) The Aleander C ompany plans to issue $10,000,000 of 10-year bonds at par next J une, with sem iannual int er est paym ents. The company' s cur rent cost of debt is 10 per cent. However, t he fir m' s financial manager is concer ned that interest rates will incr ease in coming m ont hs, and has decided to take a short position in U. S. gover nm ent t-bond fut ur es. See the set tlement data below for t -bond fut ur es. (Note: One standar d futures contr act is $100,000) Delivery Month (1) Dec Mar J une Open (2) 103' 14 102' 11 101' 14 High (3) 103' 14 102' 23 101' 26 Low (4) 102' 11 100' 28 100' 02 Sett le (5) 102' 17 101' 01 100' 12 Change (6) -6 -5 -5 Open Int er est (7) 678000 135855 17255 a. Calculat e the present value of the cor por ate bonds if rates increase by 2 per cent age point s. b. Calculate t he gain or loss on the cor por ate bond posit ion. c. Calculate the number of contracts requir ed t o cover the bond posit ion. Then calculat e the cur rent value of t he futures position. d. Calculate t he implied int erest rate based on t he cur rent value of the futures posit ion. e. Int er est rat es incr ease as expect ed, by 2 per cent age point s. Calculate t he present value of t he fut ur es position based on the rat e calculated above plus t he 2 points. f. Calculate the gain or loss on the futur es position. g. Calculat e the overall net gain or loss. h. Is t his problem an example of a perfect hedge or a cross hedge? Is it an example of speculation or hedging? Why