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 14%. 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	94'280	95'130	94'220	95'050	+0'070	591,944
Mar	96'030	96'030	95'130	95'250	+0'080	120,353
June	95'030	95'170	95'030	95'170	+0'080	13,597

1. What is the implied yield on the June futures contract ($100,000 par value, 6% coupon, semiannual payment with 20 years to maturity)? Do not round intermediate calculations. Round your answer to two decimal places.

   %

   How many futures contracts will be needed to hedge potential losses in bond proceeds (based on current market conditions) due to waiting? Round your answer up to the nearest whole number.

   The firm must -Select ONE-(sell/buy) ______ contract(s) to cover the planned $10,000,000 June bond issue.

   What is the total value of the hedge position? Use the rounded value of the number of contracts. Round your answer to the nearest cent.

   $

2. Assume that interest rates in general increase by 200 basis points. Suppose the bond's terms don't change and that the coupon rate is still 14%. How much would the proceeds be given the new market rates? Do not round intermediate calculations. Round your answer to the nearest cent.

   $

   What is the loss in proceeds based on the original target for proceeds? Do not round intermediate calculations. Round your answer to the nearest cent. Enter your answer as a positive value.

   $

3. Assume that Zinn had entered the hedge found in part a. What is the new price of the hedge position? Use the rounded value of the number of contracts from part a. Do not round other intermediate calculations. Round your answer to the nearest cent.

   $

   What is the gain on the hedge? Use the rounded value of the number of contracts from part a. Do not round other intermediate calculations. Round your answer to the nearest cent.

   $

   What is the net effect of the loss of proceeds and the gain on the hedge? Use the rounded value of the number of contracts from part a. Do not round other intermediate calculations. Round your answer to the nearest cent. Enter your answer as a positive value.

   On net, the firm -Select ONE-gained/lost $______.

PLEASE WRITE OUT ALL CALCULATIONS CLEARLY! THANK YOU!