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Problem1. The zerox Company plans to issue $10,000,000 of 10-year bonds next June, with semi-annual interest payments. The company's current cost of debt is 10 percent. But, the firm's financial manager is concerned that interest rates will rise in coming months, and has decided to take a short position in U. S. government t-bond prospects. See the settle data below for t-bond futures

Month          Settle

(1)                (5)
Dec            102-16
Mar            101-08
June           100-13

a. Compute the present value of the corporate bonds if rates rise by 2 percentage points

b. Compute the gain or loss on the corporate bond position.

c. Compute the current value of the futures position.

d. Compute the implied interest rate based on the current value of the futures position.

e. Interest rates increase as expected, by 2 percentage points. find out the present value of the futures position based on the rate computed above plus the 2 points.

f. Compute the gain or loss on the futures position.

g. Compute the overall net gain or loss.

h. Is this problem an ex of a perfect hedge or a cross hedge? Is it an ex of speculation or hedging? Why?

Financial Accounting, Accounting

  • Category:- Financial Accounting
  • Reference No.:- M93773

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