“The Aleander Company plans to issue $10,000,000 of 20-year bonds next December. The company’s current cost of debt is 9 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. Delivery Month Settle (1) (5) Dec 102-17 Mar 101-01 June 100-12
a. Calculate the current value of the futures position.
b. Calculate the implied interest rate based on the current value of the futures position.
c. Interest rates increase as expected, by 2 percentage points. Calculate the present value of the futures position based on the rate calculated above plus the 2 points.
d. Calculate the gain or loss on the futures position.
e. Calculate the present value of the corporate bonds if rates increase by 2 percentage points.
f. Calculate the gain or loss on the corporate bond position.
g. Calculate the overall net gain or loss.
h. Is this problem an example of a perfect hedge or a cross hedge? Is it an example of speculation or hedging? Why?”