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:
Futures Prices: Treasury Bonds-$100,000; Pts. 32nds of 100%
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.