DeWalden Resources Inc. plans to issue $30,000,000 of 10-year debt in September, and the chief financial officer
Question:
DeWalden Resources Inc. plans to issue $30,000,000 of 10-year debt in September, and the chief financial officer is concerned that interest rates will rise over the next six months until the debt is raised. The current cost of debt for De Walden Resources is 7.50%. The following futures prices are available.
Futures Prices: Government of Canada Bonds-$100,000; Price in%
Delivery.........................................Month Price
June .................................................... 96.58
September .......................................... 97.61
December .............................................97.24
a. Use the data given to hedge against rising interest rates.
b. Assume that interest rates increase by 250 basis points. How well did your hedge perform?
c. Assume that interest rates fall by 100 basis points. How well did your hedge perform?
Cost Of DebtThe 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...
Step by Step Answer:
Financial Management Theory And Practice
ISBN: 978-0176583057
3rd Canadian Edition
Authors: Eugene Brigham, Michael Ehrhardt, Jerome Gessaroli, Richard Nason