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Final Examination FINC 5880 Session 9 Question 4. (20 points) The Marcus Corporation plans to issue $10,000,000 of 20-year bonds next June, with sem...

Question 4. (20 points) The Marcus Corporation plans to issue $10,000,000 of 20-year bonds 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. The following settle data are available for t-bond futures.
Final Examination FINC 5880 Session 9 Delivery Month Settle (1) (5) Dec 99-17 Mar 98-01 June 97-12 Question 4 . (20 points) The Marcus Corporation plans to issue $10,000,000 of 20-year bonds interest payments. The company's current cost of debt is 12 percent. However, the firm's fin concerned that interest rates will increase in coming months, and has decided to take a shor government t-bond futures. The following settle data are available for t-bond futures. Use short hedge, sell futures contracts. Sell 200 contracts ($100,000 x 100 = $20 million). January 2 $21,056,250 ($20 million x 105 9/32%). If interest rates rise by January company can repurchase fu loss from financing at the higher interest rate. So, the firm has hedged against rising interest rates. It represents the percentage of par the bond is selling at. It is expressed in full percentage points plu units of $100,000, so the value of one such unit would be $100,000 x 105 9/32%. The easiest way t add 100, or 105.28125%. Then 105.28125% x $100,000 = $105,281.25. c. Calculate the current value of the futures position. a. Calculate the present value of the corporate bonds if rates increase by 3 percentage point b. Calculate the gain or loss on the corporate bond position.
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d. Calculate the implied interest rate based on the current value of the futures position. e. Interest rates increase as expected, by 3 percentage points. Calculate the present value o on the rate calculated above plus the 3 points . f. Calculate the gain or loss on the futures position. g. Calculate the overall net gain or loss. h. Is the company hedging or speculating? Why? Which is riskier? Why?
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Final Examination
FINC 5880
Session 9
Question 4. (20 points) The Marcus Corporation plans to issue $10,000,000 of 20-year bonds next June, with semiannual interest
payments. The company's current...

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