The Marcus Corporation plans to issue $5,000,000 of 10-year bonds at par next Ju
ID: 2641176 • Letter: T
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)
*must show calculations
Calculate the implied interest rate based on the current value of the futures position.
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 9,802Explanation / Answer
Implied interest rate = (100 - (97+12/32)) / 100 *12/6
= 5.25%
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