Question
It is February, Beta Co. will issue $1 million in bonds in August. Beta is worried interest rates will rise between now and then. Current
It is February, Beta Co. will issue $1 million in bonds in August. Beta is worried interest rates will rise between now and then. Current interest rates are 7% for the 25-year issue. But Beta fears rates might rise by 1% by June. June T-bond futures are priced at 111-20.
1) Without hedging what happens is interest rates increase by 1%, i.e., at a yield of 8%. How much will the $1 million worth of 25-year 7 semi-annual coupon bonds be worth.
2) How to set the hedging and what is the effectiveness of the hedge? Demonstrate with calculations.
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Money Banking and Financial Markets
Authors: Stephen Cecchetti, Kermit Schoenholtz
4th edition
007802174X, 978-0078021749
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