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.

EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter3: Evaluation Of Financial Performance
Section: Chapter Questions
Problem 17P
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The Zinn Company plans to issue $20,000,000 of 10-year bonds in March 2018
to help finance a new research and development laboratory. Assume that interest rate
futures maturing in March 2018 are selling for 125–145. It is now early June, 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.
a. 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.

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