The Zinn Company plans to issue $20,000,000 of 10 year bonds in December to help finance a new research and development laboratory It is now August, and the current cost of debt to the high risk biotech company is 11 However, the firms financial manager is concerned that interest rates will climb e...

a In this situation the firm would be hurt if interest rates were to rise by December so it would use a short hedge or sell futures contracts Since fu ...

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

Question:

The Zinn Company plans to issue $20,000,000 of 10-year bonds in December to help finance a new research and development laboratory. It is now August, and the current 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.
a. Use data in Table 18-3 to create a hedge against rising interest rates.
b. Assume that interest rates generally increase by 200 basis points. How well did your hedge perform?
c. What is a perfect hedge? Are most 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...