1. How can swaps be used to reduce the risks associated with debt contracts?
2. What is the implied interest rate on a Treasury bond ($100,000) futures contract that settled at 100-16? If interest rates increased by 1 percent, what would be the contract's new value?
3. 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:
|
Delivery
Month
(1)
|
Open
(2)
|
High
(3)
|
Low
(4)
|
Settle
(5)
|
Change
(6)
|
Open
Interest
(7)
|
|
Dec
|
94-28
|
95-13
|
94-22
|
95-05
|
+7
|
591,944
|
|
Mar
|
96-03
|
96-03
|
95-13
|
95-25
|
+8
|
120,353
|
|
June
|
95-03
|
95-17
|
95-03
|
95-17
|
+8
|
13,597
|
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.