Question
Please Show Work Step By Step, NO Excel. Thank you! Duke Power plans to issue $100 million of bonds. It needs one month to prepare
Please Show Work Step By Step, NO Excel. Thank you!
Duke Power plans to issue $100 million of bonds. It needs one month to prepare the documentation. It is concerned that interest rates might rise before it can sell the issue. its current new-issue rate is 9% for 30 year bonds.
a) the yield on 8% 20 year Treasury bonds is 7.5%. The yield on these bonds will rise to 8.5% if Duke's borrowing cost rises to 10%. Calculate the hedge ratio:
b) calculate the number of Treasury bond futures contracts Duke should sell to hedge its risk:
c) calculate Duke's missed issuance opportunity cost and its profit on the futures contracts if interest rates rise by 1%:
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started