CORPORATE FIN.(LL)-W/ACCESS >CUSTOM<
11th Edition
ISBN: 9781260269901
Author: Ross
Publisher: MCG CUSTOM
expand_more
expand_more
format_list_bulleted
Textbook Question
Chapter 25, Problem 8CQ
Hedging Interest Rates A company has a large bond issue maturing in one year. When it matures, the company will float a new issue. Current interest rates are attractive, and the company is concerned that rates next year will be higher. What are some hedging strategies that the company might use in this case?
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solutionStudents have asked these similar questions
Stuck on this question. Long-term Borrowing Company (LBC) is raising new capital by selling bonds. Its investment bankers have estimated that if the company sets the coupon rate for the new bonds at 8% paid semiannually, it can sell them in the market for $1,102 per bond. The new bonds will have 15 years to maturity. The bankers have estimated that the cost of selling the new bonds will be $25 per bond. What is the company’s after-tax cost of new debt for this new financing if its tax rate is 30 percent? I see in another solution that the before tax cost of debt is 7.1546%. I don't understand the calculation to get that percentage.
An investor is considering the purchase of a(n) 8.125%, 15-year corporate bond that's being priced to yield 10.125%. She thinks that in a year, this bond will be priced in the market to yield 9.125%. Using annual compounding, find the price of the bond today and in 1 year. Next, find the holding period return on this investment, assuming that the investor's expectations are borne out.
Bond value and changing required returns Midland Utilities has a bond issue outstanding that will mature to its $ 1000 par value in 17 years. The bond has a coupon interest rate of 9% and pays interest annually.a. Find the value of the bond if the required return is (1) 9%, (2) 13%, and (3) 6%.b. Use your finding in part a and the graph here, to discuss the relationship between the coupon interest rate on a bond and the required return and the market value of the bond relative to its par value.c. What two possible reasons could cause the required return to differ from the coupon interest rate?
Chapter 25 Solutions
CORPORATE FIN.(LL)-W/ACCESS >CUSTOM<
Ch. 25 - Prob. 1CQCh. 25 - Prob. 2CQCh. 25 - Prob. 3CQCh. 25 - Prob. 4CQCh. 25 - Prob. 5CQCh. 25 - Prob. 6CQCh. 25 - Option Explain why a put option on a bond is...Ch. 25 - Hedging Interest Rates A company has a large bond...Ch. 25 - Prob. 9CQCh. 25 - Prob. 10CQ
Ch. 25 - Prob. 11CQCh. 25 - Prob. 12CQCh. 25 - Prob. 13CQCh. 25 - Prob. 14CQCh. 25 - Hedging Strategies William Santiago is interested...Ch. 25 - Prob. 16CQCh. 25 - Prob. 1QPCh. 25 - Prob. 2QPCh. 25 - Prob. 3QPCh. 25 - Prob. 4QPCh. 25 - Prob. 5QPCh. 25 - Duration What is the duration of a bond with three...Ch. 25 - Duration What is the duration of a bond with four...Ch. 25 - Duration Blue Stool Community Bank has the...Ch. 25 - Prob. 9QPCh. 25 - Prob. 10QPCh. 25 - Prob. 11QPCh. 25 - Prob. 12QPCh. 25 - Prob. 13QPCh. 25 - Forward Pricing You enter into a forward contract...Ch. 25 - Forward Pricing This morning you agreed to buy a...Ch. 25 - Prob. 16QPCh. 25 - What is the monthly mortgage payment on Jerrys...Ch. 25 - Prob. 2MCCh. 25 - Prob. 3MCCh. 25 - Prob. 4MCCh. 25 - Suppose that in the next three months the market...Ch. 25 - Are there any possible risks Jennifer faces in...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Find the Macaulay duration and the modified duration of a 15-year, 7.5% corporate bond priced to yield 5.5%. According to the modified duration of this bond, how much of a price change would this bond incur if market yields rose to 6.5%? Using annual compounding, calculate the price of this bond in one year if rates do rise to 6.5%. How does this price change compare to that predicted by the modified duration? Explain the difference.arrow_forwardFind the Macaulay duration and the modified duration of a 15-year, 9.0% corporate bond priced to yield 7.0%. According to the modified duration of this bond, how much of a price change would this bond incur if market yields rose to 8.0%? Using annual compounding, calculate the price of this bond in one year if rates do rise to 8.0%. How does this price change compare to that predicted by the modified duration? Explain the difference. The Macaulay duration is nothing years. (Round to two decimal places.) The modified duration is nothing years. (Round to two decimal places.) If market yields rose to 8.0%, the change would be nothing%. (Round to two decimal places.) Using annual compounding, the price of this bond in 1 year if rates do rise to 8.0% is $nothing. (Round to the nearest cent.) The actual percentage change in bond price is nothing%. (Round to two decimal places.) Which of the following is true? (Select the best choice below.) A.…arrow_forwardInterest Rate Sensitivity A bond trader purchased each of the following bonds at a yield to maturity of 8%. Immediately after she purchased the bonds, interest rates fell to 7%. What is the percentage change in the price of each bond after the decline in interest rates? Assume annual coupons and annual compounding. Fill in the following table:arrow_forward
- Bond Valuation and Interest Rate Risk The Garraty Company has two bond issues outstanding. Both bonds pay 100 annual interest plus 1,000 at maturity. Bond L has a maturity of 15 years, and Bond S has a maturity of 1 year. a. What will be the value of each of these bonds when the going rate of interest is (1) 5%, (2) 8%, and (3) 12%? Assume that there is only one more interest payment to be made on Bond S. b. Why does the longer-term (15-year) bond fluctuate more when interest rates change than does the shorter-term bond (1 year)?arrow_forwardBond Yields and Rates of Return A 10-year, 12% semiannual coupon bond with a par value of 1,000 may be called in 4 years at a call price of 1,060. The bond sells for 1,100. (Assume that the bond has just been issued.) a. What is the bonds yield to maturity? b. What is the bonds current yield? c. What is the bonds capital gain or loss yield? d. What is the bonds yield to call?arrow_forwardWhat do you have to do to the interest rate and years of maturity if a bond pricing problem tells you that interest is compounded quarterly?arrow_forward
- USE FORMULA APPROACH OR CALCULATOR APPROACH ONLY (NO EXCEL) (a) What is the value of the bond if the bond matures in 30 years? (b) What is the value of the same bond 20 years later, when it has 10 years to maturity left, if interest rates have not changed?arrow_forwardTime value of money practice problems. How would you solve these using a financial calculator? What values would you enter for N, I/YR, PV, PMT, and FV ? *assume coporate bonds pay 2x annually and have a FV on $1000 b) What is the PV of a 20-year corporate bond issued 5 years ago paying a 5% interest rate when similar bonds today pay 4.5%?arrow_forwarda) Calculate the rate of capital gain or loss on a ten-year zero coupon bond which the interest rate has increased from 12% to 15%. The bond has a face value of Tshs. 1,000,000.00 b) A manager of a financial institution is holding 35% of a portfolio in a bond with a five year duration and 65% in a bond with a ten-year duration. What is the duration of the portfolio? c) Briefly explain the factors affecting interest rate risks of a firmarrow_forward
- Unbiased Expectations Theory Suppose that the current one-year rate (one-year spot rate) and expected one-year T-bill rates over the following three years (i.e., years 2, 3, and 4, respectively) are as follows: 1R1=4.25%, E(2r1) =5.25%, E(3r1) =5.75%, E(4r1)=6.10% Using the unbiased expectations theory, what is the current (long-term) rate for four-year-maturity Treasury securities?arrow_forwardQUESTION 9 Last month, you invested $5,000 in a 10-year corporate bond to hold as an investment. If the Fed announces that they will increase interest rates next month, what is the expected impact on the value of your investment in the bond? A. Bond price will decline due to the interest rate increase B. The bond will continue to pay the same coupon rate, so the bond price will not change C. Bond price will increase due to the interest rate increasearrow_forwardBond value and changing required returns Midland Utilities has a bond issue out-standing that will mature to its $1,000 par value in 12 years. The bond has a cou-pon rate of 11% and pays interest annually. a. Find the value of the bond if the required return is (1) 11%, (2) 15%, and (3) 8%.b. Plot your findings in part a on a set of “required return (x-axis)–market value of bond (y-axis)” axes.c. Use your findings in parts a and b to discuss the relationship between the coupon rate on a bond and the required return and the market value of the bond relative to its par value.d. What two possible reasons could cause the required return to differ from the coupon ratearrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage LearningEBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
- Principles of Accounting Volume 1AccountingISBN:9781947172685Author:OpenStaxPublisher:OpenStax College
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Principles of Accounting Volume 1
Accounting
ISBN:9781947172685
Author:OpenStax
Publisher:OpenStax College
Journalizing Bonds Payable/Amortization of a Premium; Author: TLC Tutoring;https://www.youtube.com/watch?v=5gEpAFFnIE8;License: Standard YouTube License, CC-BY
Investing Basics: Bonds; Author: TD Ameritrade;https://www.youtube.com/watch?v=IuyejHOGCro;License: Standard YouTube License, CC-BY