Question: The Zinn Company plans to issue 10 000 000 of 20 year bonds

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

a. Use the data given to create a hedge against rising interest rates.
b. Assume that interest rates in general increase by 200 basis points.
Use the data from the above problem, but slightly different:
Problem Inputs:
Size of planned debt offering = $20,000,000
Anticipated rate on debt offering = 10%
Maturity of planned debt offering = 10
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
a. Create a hedge with the futures contract for Zinn Company’s planned June debt offering of $20 million. What is the implied yield on the bond underlying the future’s contract?
b. Suppose interest rates fall by 200 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 hedgedposition?
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  • CreatedJune 14, 2012
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