Problem Inputs:
Size of planned debt offering = $1,00,00,000
Anticipated rate on debt offering = 8%
Maturity of planned debt offering = 20
Number of months until debt offering = 6
a) Calculate Settle price on futures contract. Please keep in mind that for bonds decimals are in 32ds. 100-5 is (100+5/32) % of par which is $1,000
Maturity of bond underlying futures contract = 20
Coupon rate on bond underlying futures contract = 6%
Size of futures contract (dollars) = $1,00,000
b) 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?
c) Suppose interest rates increase by 150 basis points and then by 250 basis points). What is the dollar savings from issuing the debt at the new interest rate? What is the dollar change in value of the futures position? What is the total dollar value change of the hedged position?