Continuing growth of the company has required that we issue the company's corporate debt soon.
As you know, in 6 months we plan to issue $10 million worth of 20-year corporate bonds with a coupon of 8%, paid semiannually. Since this is our first large issue of longer term debt, I am concerned that the interest rates may drift higher over these months prior to the actual bond issuance. Could you come up with any suggestions as to how to protect us against a possible change in interest rates?
If you decide to use Treasury bond futures contracts,
When interest rates increase by 150 basis points.
When interest rates increase by 250 basis points.
What's needed from you
Describe the main characteristics of the futures contracts Bob suggested in his reply (such as price of a standard contract, term to maturity, and semiannual coupon rate of a standard contract) and whether you have enough information for the assessment of the hedge.
Determine the implied semiannual yield on the futures contracts, given the price of 96-19. As a reminder, T-bond futures are $100,000 per contract, 20-year to maturity, 6% coupon, semiannual compounding.
For the purpose of this case, you may assume that there are no transaction costs to buy or sell any futures contracts. You would want to use either the Excel function called RATE or a financial calculator.
Determine how many contracts you would need to hedge the entire amount of the issuance of the bonds and what you should do -- buy or sell?
a) Number of contra cts needed for the hedge
b) Value of the contracts in hedge
c) Determine implied annual yield using the data calculated in Step 2 and Excel function RATE.