Hedging: The Zinn Company plans to issue $12,000,000 of 20-year bonds I June to help finance a new research and development laboratory. The bonds will pay interest semi-annually. It is now November, and the current cost of debt to the high-risk biotech company is 6.0% However, the firm's finance manager is concerned that interest rates will climb even higher in coming months. A futures contract with June deliver is available at a price quoted as 98'16.
a. Use this information to create a hedge against rising interest rates.
b. Assume that interest rates in general increase by 150 basis points. How well did your hedge perform?