The Telex Company plans to issue $20,000,000 of 10-year bonds at par next June, with semiannual interest payments. The company's current cost of debt is 12% . However, the firm's financial manager is concerned that interest rates will increase in coming months, and has decided to take a short position in U. S. government t-bond futures. See the settlement data below for t-bond futures. (Note: One standard future contract is $100,000)

Delivery Month	Open	High	Low	Settle	Change	Open Interest
(1)	(2)	(3)	(4)	(5)	(6)	(7)
Dec	102'13	102'25	102'15	102'17	+2	489,777
Mar	102'02	102'25	101'01	101'01	-5	105,033
June	101'13	101'15	100'02	100'30	-1	15,002

a. Calculate the present value of the corporate bonds if rates increase by 2 percentage points.

b. Calculate the gain or loss on the corporate bond position.

c. Calculate the number of futures contracts required to cover the bond position (round to the nearest whole number). Then calculate the current value of the futures position.

d. Calculate the implied interest rate based on the current value of the futures position.

e. Interest rates increase as expected, by 2 percentage points. Calculate the present value of the futures position based on the rate calculated above plus the 2 points.

f. Calculate the gain or loss on the futures position.

g. Calculate the overall net gain or loss.

h. Is this problem an example of a perfect hedge or a cross hedge? Is it an example of speculation or hedging? Why?

Answer rating: 100% (QA)

Bond issuance Term 20000000 y ID Int payment Jemiannual 20 121 No ... View the full answer