Hedging The Zinn Company plans to issue $20,000,000 of 10-year semiannual bonds

Question

Hedging

The Zinn Company plans to issue $20,000,000 of 10-year semiannual bonds in June 2012 to help finance a new research and development laboratory. It is now early September, and the current cost of debt to the high-risk biotech company is 10%. The coupon rate equals 10%. However, the firm's financial manager is concerned that interest rates will climb even higher in coming months.

US 10 Yr T-Notes Comp. - cbot

Contract Month Last Chg Open High Low Volume OpenInt Exchange Date Time

10 Yr Note Sep'11 131'04.5 -0'05.0 131'08.5 131'27.5 131'03.5 52142 74026 CBT 09/06/11 16:22:21

10 Yr Note Dec'11 130'06.5 -0'05.0 130'11.5 130'31.0 130'06.0 1006722 1725046 CBT 09/06/11 16:22:29

10 Yr Note Mar'12 129'11.5y 0 1 CBT 09/02/11 19:02:37

10 Yr Note Jun'12 128'11.5y 0 0 CBT 09/02/11 19:02:37

10 Yr Note Sep'12 127'11.5y 0 0 CBT 09/02/11 19:02:37

Assume that interest rates in general increase by 200 basis points. How much did the firm gain or lose? (Hint: The future contracts are on hypothetical 10-year, 6% semiannual coupon bonds.)

Round your answer to two decimal places. $________

Explanation / Answer

$ 312625 answer

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