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##### Problem Inputs: Size of planned debt offering =...

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Problem Inputs: Size of planned debt offering = \$10,000,000 Anticipated rate on debt offering = 11% Maturity of planned debt offering = 20 Number of months until debt offering = 7 Settle price on futures contract (% of par) = 95.53125% Maturity of bond underlying futures contract = 20 Coupon rate on bond underlying futures contract = 6% Size of futures contract (dollars) = \$100,000 Create a hedge with the futures contract for Zinn Company?s planned June debt offering of \$10 million. 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 = rounding = 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 at the new interest rate? What is the dollar change in value of the futures position? What is the total dollar 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 futures contract = New value of each futures contract Value of all fo the futures contract at new yield = Dollar change in value of the futures 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. Change in rate Dollar change in cost/savings of issue Dollar change in value of futures position Total dollar value change of hedge Base -300 -300 -200 -100 0 100 200 300 What is this? By Business Expert Manal Elkhoshkhany, MBA Purchase Cost Now \$2.19 CAD (was ~\$3.99) This answer includes Plain text response Attached file(s): Brainmass - 317191.xls You can trust BrainMass.com Your info is private and secure The web's best academic assistance Our users get better grades,The Zinn company plans to issue \$10,000,000 of 20-year bonds in June to help finance a new research and development laboratory. The bonds will pay interest semiannually. It is now November, 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. The following data are available: Futures price: Treasury Bonds- \$100,000; pts- 32nds of 100 Delivery mo Open High Low Settle Change Open Interest December 94-28 95-13 94-22 95-05 +7 591,944 Mar 96-03 96-03 95-13 95-25 +8 120,353 June 95-03 95-17 95-03 95-17 +8 13,597

Paper#10290 | Written in 18-Jul-2015

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