Problem:
A company plans to issue $20,000,000 of 20-year bonds next June. The company's current cost of debt is 10%. But 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
What is the current value of the futures position & the implied interest rate based on the current value of the futures position? Now if interest rates increase as expected, by 2 percentage points. What is the present value of the futures position based on the rate calculated above plus the 2 points? Once I figure that out, is it a gain or loss on the corporate bond position? Over all is it a net gain or loss?