Problem Inputs:

Size of planned debt offering = $20,000,000

Anticipated rate on debt offering = 10%

Maturity of planned debt offering = 20

Number of months until debt offering = 5

Settle price on futures contract (% of par) = 94.78125%

Maturity of bond underlying futures contract = 20

Coupon rate on bond underlying futures contract = 6%

Size of futures contract (dollars) = $100,000

a.Create a hedge with the futures contract for F Pierce's planned March debt offering of $20million.What is the implied yield on the bond underlying the future's contract?

Value of each T-Bond futures contract =______?

Number of contracts needed for hedge = _____? Round = _______?

Value of contracts in hedge = _____?

Implied semi-annual yield = _____?

Implied annual yield = _____?

b.Suppose interest rates fall by 300 basis points. What is the dollar savings from issuing the debt atthe new interest rate?What is the dollar change in value of the futures position?What is the totaldollar value change of the hedged position?

Change in interest rate on debt offering (basis points) = -300

New interest rate on debt = _____?

Value of issuing at new rate interest = _____?

Dollar value savings or cost from issuing debt at the new rate = _____?

New yield on future contract + _____?

Value of all future contract at new yield = _____?

Dollar change in value of the future position = _____?

Total dollar value change of hedge = _____?

c.Create a graph showing the effectiveness of the hedge if the change in interest rates, in basis points, is: -300, -200, -100, 0, 100, 200, or 300.Show the dollar cost (or savings) from issuing the debt at the new interest rates, the dollar change in value of the futures position, and the total dollar value change.

Dollar Dollar change in value of Total Dollar

change in future position Value change

cost/savings of hedge

Change in rate of issue

Base -300 __________ ____________________ ____________

-300 __________ ____________________ ____________

-200 __________ ____________________ ____________

-100 __________ ____________________ ____________

0 __________ ____________________ ____________

100 __________ ____________________ ____________

200 __________ ____________________ ____________

300 __________ ____________________ ____________