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

Question:

The Zinn Company plans to issue $10,000,000 of 10-year bonds in June to help finance a new research and development laboratory. It is now November, and the current cost of debt to the high-risk biotech company is 11 percent. 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%

LIFETIME Delivery Month (1) (2) Open Interest High (3) Low (4) Settle (5) High (7) Open Low (8) 93-08 94-21 95-02 Change

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 most real-world hedges perfect? Explain.

Bonds
When companies need to raise money, issuing bonds is one way to do it. A bond functions as a loan between an investor and a corporation. The investor agrees to give the corporation a specific amount of money for a specific period of time in exchange... 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...