The Marcus Corporation plans to issue $5,000,000 of 10-year bonds at par next Ju

Question

The Marcus Corporation plans to issue $5,000,000 of 10-year bonds at par next June, with semiannual interest payments. The company's current cost of debt is 12 percent. However, the firm's financial manager is concerned that interest rates will increase in coming months, and has decided to take a short position in U. S. government t-bond futures. See the settlement data below for t-bond futures. (Note: One standard futures contract is $100,000)

a. Calculate the present value of the corporate bonds if rates increase by 3 percentage points.

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

c. Calculate the number of futures contracts required to cover the bond position. Then calculate the current value of the futures position (round up to next whole number).

Delivery Month Open High Low Settle Change Open Interest (1) (2) (3) (4) (5) (6) (7) Dec 97'28 99'17 98'22 99'17 +5 387,255 Mar 98'03 98'21 97'23 98'01 +12 90,353 June 98'13 98'27 97'01 97'12 +7 9,802

a. Calculate the present value of the corporate bonds if rates increase by 3 percentage points.

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

c. Calculate the number of futures contracts required to cover the bond position. Then calculate the current value of the futures position (round up to next whole number).

Explanation / Answer

a) Using excel formula:

=-PV(0.15/2,20,5000000*0.12/2,5000000)

= 4235413

b) Loss = 4235413 - 5000000 = (-) 764587

c) No of contract required = 5000000 / 100000 = 50

Current value of future position = 5000000 * (.97+12/32/100)

= 4868750

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.