The Zinn Company plans to issue $10,000,000 of 20-year bonds in June to help finance a new

Question:

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 Prices: Treasury Bonds-$100,000; Pts. 32nds of 100%

a. Use the given data to create a hedge against rising interest rates.
b. Assume that interest rates in general increase by 200 basis points. How
well did your hedge perform?
c. What is a perfect hedge? Are any real-world hedges perfect? Explain.

Cost Of Debt
The 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...