# What is the implied interest rate on a Treasury bond

24 / 01 / 2019 Assignments

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## What is the implied interest rate on a Treasury bond

QUESTION #1a) What is the implied interest rate on a Treasury bond (\$100,000, 6% coupon, semiannual payment with 20 years to maturity) futures contract that settled at 100’20? Round your answer to two decimal places. %b) If interest rates increased by 1%, what would be the contract’s new value? Round your answer to the nearest cent.\$ QUESTION #2HedgingThe Zinn Company plans to issue \$10,000,000 of 20-year bonds in June to help finance a new research and development laboratory. The bonds will pay interest semiannually. It is now November, and the current cost of debt to the high-risk biotech company is 13%. However, the firm’s financial manager is concerned that interest rates will climb even higher in coming months. The following data are available:Futures Prices: Treasury Bonds – \$100,000; Pts. 32nds of 100%Delivery MonthOpenHighLowSettleChangeOpen Interest(1)(2)(3)(4)(5)(6)(7)Dec94’2895’1394’2295’05+0’07591,944Mar96’0396’0395’1395’25+0’08120,353June95’0395’1795’0395’17+0’0813,597a) Use the given data to create a hedge against rising interest rates. Round your answer to the nearest whole number.The firm must sell contract(s) to cover the planned \$10,000,000 June bond issue.b) Assume that interest rates in general increase by 100 basis points. How well did your hedge perform? (i.e., What is the net gain or loss?)Hint:Use settlement price in your evaluations. A net loss should be indicated with a minus sign. Do not round intermediate calculations. Round your answer to the nearest dollar.On net the firm gained \$ .

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