Zinn Company: Hedging interest rate risk using t-bond futures
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%. However, the firm's financial manager is concerned that interest rates will climb even higher in coming months. The following data are available:
Futures price: Treasury Bonds- $100,000; pts- 32nds of 100
Delivery mo Open High Low Settle Change Open Interest
December 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
Create a hedge with the futures contract for Zinn Company's planned June debt offering of $10 million. What is the implied yield on the bond underlying the future's contract?