Calculate the new interest rate and excel function pv, Financial Accounting

Assignment Help:

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, I think you could use the December futures settlement price of 96-19. Please consider calculating the outcomes of two possible scenarios:

1.  When interest rates increase by 150 basis points.

2.  When interest rates increase by 250 basis points.

What's needed from you:

  1. 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.
  2. 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.
  3. 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.
  4. 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?
    1. Number of contracts needed for the hedge
    2. Value of the contracts in hedge
      Hint: First convert the settlement value from 32s into decimals, then multiply by the value in Step 3 (a) above.
    3. Determine implied annual yield using the data calculated in Step 2 and Excel function RATE.
  5. Test your first scenario when interest rates increase by 150 basis points, as follows:
    1. Calculate the new interest rate on debt as the agreed-upon rate on actual bonds + 150 basis points;
    2. Calculate the value of issuing the actual bonds at the new higher interest rate, using the new rate as your yield to maturity on the bonds and the agreed-upon rate as your coupon rate.
    3. Determine the dollar value loss or savings from issuing debt at the new rate.
    4. Calculate the new yield on the futures contract as the implied annual yield from Step 5(c) + 150 basis points.
    5. Calculate the value of futures contracts at the new yield, using the Excel function PV, where your YTM=new yield from Step 4 (d) and the coupon rate is the coupon on a standard futures contract.
    6. Once you have determined the new value of the futures contracts in hedge in Step 4 (e), you can calculate the dollar change in value of the futures position as the difference between the value in Step 5(f).
    7. The last element: the total dollar value change of the position will be the sum of the dollar values in Steps 4 (c) and 4 (f).
  6. Please follow Step 4, but using the second scenario where interest rates are expected to change by 250 basis points.

Deliverables

The end result should be the dollar value change of the position (4g) for 150 basis points and 250 basis points for 5g. Support your answer by showing all the calculations, preferably in a worksheet. Submit your analysis to my drop box.


Related Discussions:- Calculate the new interest rate and excel function pv

Calculate economic profit, Calculate Economic profit: Suppose a monopo...

Calculate Economic profit: Suppose a monopolistically competitive firm is facing the following demand and cost information. a.  If the firm is a profit maximizer, how

Venture capital, concept meaning features scope importance origin initiativ...

concept meaning features scope importance origin initiative in india

Briarcrest condiments is a spice-making firm, 1. Briarcrest Condiments is a...

1. Briarcrest Condiments is a spice-making firm. Recently, it developed a new process for producing spices. The process requires new machinery that would cost $2,218,246. have a

Mini-max system, In this method the minimum and maximum level for all items...

In this method the minimum and maximum level for all items of inventory are fixed. These levels function as an origin for initiating action so that the quantity of all items is con

Determine estimated cost, XYZ Company is a large manufacturer of auto parts...

XYZ Company is a large manufacturer of auto parts for the auto manufacturers and parts distributors. XYZ has plants throughout the world, but most are located in North America. XYZ

Qualitative characteristics , Since 1968, Dracula Limited has traded in Don...

Since 1968, Dracula Limited has traded in Doncaster, South Yorkshire as a manufacturer of fancy-dress and theatrical costumes. It produces a wide range of general theatrical costum

Corporate accounting system, 1. This assignment is to be submitted as an in...

1. This assignment is to be submitted as an individual assignment.  2. Marks will be deducted for poor quality presentation. For guidance on the requirements for the presentatio

Complete the cash flow spreadsheet, This lab assignment will correspond to ...

This lab assignment will correspond to developing a cash flow budget with an operating loan. There is on lab exercise listed below. Additionally, there are two assignment questions

Technique of managerial control through budgets, Budgetary Control is a tec...

Budgetary Control is a technique of managerial control through budgets. Elaborate.

Light-gauge aluminum, Tampa Foundry began operations during the present yea...

Tampa Foundry began operations during the present year, manufacturing several products for industrial use. One such product is light-gauge aluminum, which the company sells for $36

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd