To create: The hedge against increasing interest rates. Introduction: Hedge is a technique used in investment opportunity mainly to reduce the risk of adverse price movement in a firm’s assets.

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Answer 1

Question

Chapter 18, Problem 6P

a.

Summary Introduction

To create: The hedge against increasing interest rates.

Introduction:

Hedge is a technique used in investment opportunity mainly to reduce the risk of adverse price movement in a firm’s assets.

b.

Summary Introduction

To determine: The performance of hedge when the interest rate increases by 200 basis points.

c.

Summary Introduction

To discuss: The meaning of perfect hedge and whether most real-world hedges are perfect.

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The Zinn Company plans to issue $20,000,000 of 10-year bonds in March 2018to help finance a new research and development laboratory. Assume that interest ratefutures maturing in March 2018 are selling for 125–145. It is now early June, and the currentcost of debt to the high-risk biotech company is 11%. However, the firm’s financial manageris concerned that interest rates will climb even higher in coming months.a. Create a hedge against rising interest rates.b. Assume that interest rates generally increase by 200 basis points. How well did yourhedge perform?c. What is a perfect hedge? Are most real-world hedges perfect? Explain.

Energy Plus Limited (EP) is operating in the booming energy sector. The company recognized that to stay competitive it must implement projects which would reduce the cost of products to its customers. EP’s board of directors approved the recommendation to finance the project by issuing new debt. On January 1, 2014, EP issued new bonds which will mature on December 31, 2038. The bonds have a par value of $1,000 and a coupon rate of 12%. Coupon payments are made semi-annually. a) What would be the value of the bonds on December 31, 2018, if the interest rates had risen to 16%? Based on the price of the bond, how would you classify the bond? b) What would be their value on June 30, 2026, if interest rates had fallen to 8%? Based on the price of the bond, how would you classify the bond? c) If the bonds had a value of $860.00 on June 30, 2024, what would be their yield to maturity on that date?

A business plans to borrow approximately $40 million in short-term funding through the issue of commercial paper in three months’ time. The business does not have a view on what is likely to happen to interest rates over the next three months, but it would be very satisfied if it could obtain its funding at the current yield. Using the following data, show how 90-day bank-accepted bills futures contracts can be used to hedge the interest rate risk to which the business is exposed. Show the calculation and timing of all transactions and cash flows (ignore transaction costs and marginrequirements). Today’s data: current commercial paper yields 6.00 per cent perannum 90-day bank-accepted bills futures contract 93.75. Data in threemonths: commercial paper yields 7.00 per cent perannum 90-day bank-accepted bills futures contract93.25.

Answer 2

Question

Chapter 18, Problem 6P

a.

Summary Introduction

To create: The hedge against increasing interest rates.

Introduction:

Hedge is a technique used in investment opportunity mainly to reduce the risk of adverse price movement in a firm’s assets.

b.

Summary Introduction

To determine: The performance of hedge when the interest rate increases by 200 basis points.

c.

Summary Introduction

To discuss: The meaning of perfect hedge and whether most real-world hedges are perfect.

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Answer 3

Question

Chapter 18, Problem 6P

a.

Summary Introduction

To create: The hedge against increasing interest rates.

Introduction:

Hedge is a technique used in investment opportunity mainly to reduce the risk of adverse price movement in a firm’s assets.

b.

Summary Introduction

To determine: The performance of hedge when the interest rate increases by 200 basis points.

c.

Summary Introduction

To discuss: The meaning of perfect hedge and whether most real-world hedges are perfect.

Expert Solution & Answer

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Answer 4

Question

Chapter 18, Problem 6P

a.

Summary Introduction

To create: The hedge against increasing interest rates.

Introduction:

Hedge is a technique used in investment opportunity mainly to reduce the risk of adverse price movement in a firm’s assets.

b.

Summary Introduction

To determine: The performance of hedge when the interest rate increases by 200 basis points.

c.

Summary Introduction

To discuss: The meaning of perfect hedge and whether most real-world hedges are perfect.

Expert Solution & Answer

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Answer 5

Chapter 18, Problem 6P

a.

Summary Introduction

To create: The hedge against increasing interest rates.

Introduction:

Hedge is a technique used in investment opportunity mainly to reduce the risk of adverse price movement in a firm’s assets.

b.

Summary Introduction

To determine: The performance of hedge when the interest rate increases by 200 basis points.

c.

Summary Introduction

To discuss: The meaning of perfect hedge and whether most real-world hedges are perfect.

Answer 6

Chapter 18, Problem 6P

a.

Summary Introduction

To create: The hedge against increasing interest rates.

Introduction:

Hedge is a technique used in investment opportunity mainly to reduce the risk of adverse price movement in a firm’s assets.

Answer 7

Chapter 18, Problem 6P

a.

Summary Introduction

To create: The hedge against increasing interest rates.

Introduction:

Hedge is a technique used in investment opportunity mainly to reduce the risk of adverse price movement in a firm’s assets.

Answer 8

b.

Summary Introduction

To determine: The performance of hedge when the interest rate increases by 200 basis points.

Answer 9

b.

Summary Introduction

To determine: The performance of hedge when the interest rate increases by 200 basis points.

Answer 10

c.

Summary Introduction

To discuss: The meaning of perfect hedge and whether most real-world hedges are perfect.

Answer 11

c.

Summary Introduction

To discuss: The meaning of perfect hedge and whether most real-world hedges are perfect.

Answer 12

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Answer 13

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Answer 14

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Answer 15

Ch. 18.A - Prob. 1Q Ch. 18.A - Prob. 1P Ch. 18.A - Prob. 2P Ch. 18 - Prob. 1Q Ch. 18 - Why do options typically sell at prices higher...Ch. 18 - Discuss some of the techniques available to reduce...Ch. 18 - Prob. 4Q Ch. 18 - Prob. 5Q Ch. 18 - Give two reasons stockholders might be indifferent...Ch. 18 - OPTIONS A call option on Bedrock Boulders stock...

To create: The hedge against increasing interest rates. Introduction: Hedge is a technique used in investment opportunity mainly to reduce the risk of adverse price movement in a firm’s assets.

Solution Summary: The author explains that hedge is a technique used in investment opportunity to reduce the risk of adverse price movement in the firm's assets.

To create: The hedge against increasing interest rates.

Introduction:

Hedge is a technique used in investment opportunity mainly to reduce the risk of adverse price movement in a firm’s assets.

To determine: The performance of hedge when the interest rate increases by 200 basis points.

To discuss: The meaning of perfect hedge and whether most real-world hedges are perfect.

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Chapter 18 Solutions