Question
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
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 10%. 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 |
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 sell 105 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. $ 10030781.25
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 10%. How much would Zinn receive from the bond issue given the new market rates? Do not round intermediate calculations. Round your answer to the nearest cent. $
How much less is this than the original target for proceeds? Do not round intermediate calculations. Round your answer to the nearest cent. Enter your answer as a positive value. $
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- $ .
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