The 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 10%. 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 Month |
Open |
High |
Low |
Settle |
Change |
Open Interest |
| (1) |
(2) |
(3) |
(4) |
(5) |
(6) |
(7) |
| Dec |
94'28 |
95'13 |
94'22 |
95'05 |
+0'07 |
591,944 |
| Mar |
96'03 |
96'03 |
95'13 |
95'25 |
+0'08 |
120,353 |
| June |
95'03 |
95'17 |
95'03 |
95'17 |
+0'08 |
13,597 |
Use the given data to create a hedge against rising interest rates. Round your answer to the nearest whole number.
a) 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 300 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 $___ .