Scenario:  Assume Company A is expanding and needs to borrow more long term capital.

 Company A has talked with its underwriters and expects to issue the new notes on 12/1/2023.       Today is 10/1/2023.

These new notes will (once issued) have the following characteristics:

 Non-callable semi-annual fixed rate coupons.

 A principal amount (or "Par Amount") of $50,000,000 with a maturity date of 12/1/2030.  They will be issued at Par.

 Importantly:  the coupon rate has not yet been determined (it will be set on the Issuance Date).

 IF the company could issue new notes today, the coupon rate would be 6.000%.  The CFO is content with this rate but concerned

 interest rates might increase between now and the Issuance Date.

The CFO asked you to quantify the following risks.

Question A: 

How much extra interest expense will result from a 10 basis point increase in the interest rate on this note?  Use the Issuance Date as your settlement date since that is the date the new notes will bring cash into the company.                                                                                                                            

Question B:

What is the present value of the extra interest expense determined in Question A?

Question C: (3 sub-parts)

Assume the CFO convinced an underwriter (today) to buy all of the new notes on the Issuance Date and further assume the CFO

  convinced the underwriter to guarantee the Company an interest rate of 6.000%. Finally, assume: (1) interest rates did rise but only

  10 basis points and (2)  the Underwriter must sell all of the newly issued notes at the new interest rate level (and market value) on

  the Issuance Date.  Calculate and use the current Dv01 to estimate risk exposure to interest rate changes.

Due to the guarantee the CFO obtained, how much does the:

C.1.  The company lose?

C.2.  The underwriter lose?                                                                                    

C. 3.  Describe, as per class discussions, why is the loss an 'estimate' and not an absolute number.