The Zinn Company plans to issue $20,000,000 of 10-year bonds in March 2015 to help finance a

Question:

The Zinn Company plans to issue $20,000,000 of 10-year bonds in March 2015 to help finance a new research and development laboratory. It is now early June, and the current cost of debt to the high-risk biotech company is 11%. However, the firm's financial manager is concerned that interest rates will climb even higher in coming months.

a. Use data in Table 18.3 to create a hedge against rising interest rates.

b. Assume that interest rates generally increase by 200 basis points. How well did your hedge perform?

c. What is a perfect hedge? Are most real-world hedges perfect? Explain.

Cost Of Debt
The cost of debt is the effective interest rate a company pays on its debts. It’s the cost of debt, such as bonds and loans, among others. The cost of debt often refers to before-tax cost of debt, which is the company's cost of debt before taking...