Question: Hedging- answer everything for bold sections Hedging Value of bond issue next June $10,000,000 Maturity of bond issue, in years 20 Frequency of interest paid
Hedging- answer everything for bold sections
| Hedging | |||||||
| Value of bond issue next June | $10,000,000 | ||||||
| Maturity of bond issue, in years | 20 | ||||||
| Frequency of interest paid in year | 2 | ||||||
| Current annual interest (cost of debt), November | 9.00% | ||||||
| Expected increase in interest rate in basis points | 150 | ||||||
| Increase in annual interest rate in percentage | 1.50% | ||||||
| Maturity of hypothetical bond in futures contract | 20 | ||||||
| Annual coupon rate of hypothetical bond in futures contract | 6.00% | ||||||
| Futures Prices: Treasury Bonds | $100,000 | Pts. 32nds of 100% | |||||
| "Delivery Month (1)" | "Open (2)" | "High (3)" | "Low (4)" | "Settle (5)" | "Change (6)" | "Open Interest (7)" | |
| Dec | 94'28 | 95'13 | 94'22 | 95'05 | +0'07 | 591,944 | |
| Mar | 96'03 | 96'03 | 95'13 | 95'25 | +0'08 | 120,353 | |
| June | 95'03 | 95'17 | 95'03 | 95'17 | +0'08 | 13,597 | |
| To protect from rising interest rates, firm must sell futures contracts | |||||||
| Whole percentage of quote | 95 | ||||||
| 32nds of 100% of quote | 17 | ||||||
| Formulas | |||||||
| Value of 1 futures contract | #N/A | ||||||
| Number of futures contracts to sell (to the nearest whole) | #N/A | ||||||
| Total value of futures contracts | #N/A | ||||||
| Determination of how well hedge performed | |||||||
| Value of bond issue at increased interest rate | #N/A | ||||||
| Loss on bond issue | #N/A | ||||||
| Implied yield at time futures contract entered | #N/A | ||||||
| Yield with increase in interest rates | #N/A | ||||||
| Value of 1 futures contract | #N/A | ||||||
| Total value of futures contracts | #N/A | ||||||
| Profit on futures contracts, ignoring commissions | #N/A | ||||||
| Net profit | #N/A | ||||||
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