Financial Management: Theory & Practice
16th Edition
ISBN: 9781337909730
Author: Brigham
Publisher: Cengage
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Chapter 23, Problem 5P
a.
Summary Introduction
Determine: The implied yield on future contract, the number of future loss needed hedge potential loss and the total value of hedge position.
b.
Summary Introduction
Determine: Proceeds from the new market rates and the loss on proceeds based on the original target for proceeds.
c.
Summary Introduction
Determine: New price of the hedge position, gain on hedge and net effect of the loss of proceeds and gain on hedge.
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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%.
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higher in coming months. The following data are available:
Futures Prices: Treasury Bonds-$100,000; Pts. 32nds of 100%
Delivery Month
Open
Low
High
(3)
Settle Change
(5) (6)
(2)
(4)
95'130 94'220
95'050
+0'070
94'280
96'030 96'030 95'130 95'250 +0'080
95'170 +0'080
95'030 95'170 95'030
(1)
Dec
Mar
June
Open Interest
(7)
591,944
120,353
13,597
a. What is the implied yield on the June futures contract? How many futures contracts
will be needed to hedge potential losses in bond proceeds (based on current market
conditions) due to waiting (round up to the nearest integer)? What is the total value
of the hedge position?
b. Assume that interest rates…
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.
Sain and Lewis Investment Management (SLIM), Inc. is considering the purchase of a number of bonds to be issued by Southeast Airlines. The bonds have a face value of $10,000 with an interest rate of 7.5% payable annually. The bonds will mature 10 years after they are issued. The issue price is expected to be $8750. Determine the yield to maturity (IRR) for the bonds. If SLIM Inc. requires at least a 10% return on all investments, should the firm invest in the bonds?
Chapter 23 Solutions
Financial Management: Theory & Practice
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