Question
It is January, and a company is considering issuing $5 million in bonds in June to raise capital for an expansion. Currently, the firm can
It is January, and a company is considering issuing $5 million in bonds in June to raise capital for an expansion. Currently, the firm can issue 20-year bonds with a 7% coupon (with interest paid semiannually), but interest rates are on the rise and the finance manager is concerned that long-term interest rates might rise by as much as 1% before June. You looked online and found that June T-bond futures are trading at 111'250. What are the risks of not hedging, and how might the company hedge this exposure? What would happen if interest rates all increased by 1%?
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