How well did your hedge perform

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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 11%. However, the firm's financial manager is concerned that interest rates will climb even higher in coming months. The following data are available:

Futures price: Treasury Bonds- $100,000; pts- 32nds of 100

Delivery mo Open High Low Settle Change Open Interest
December 94-28 95-13 94-22 95-05 +7 591,944
Mar 96-03 96-03 95-13 95-25 +8 120,353
June 95-03 95-17 95-03 95-17 +8 13,597
Create a hedge with the futures contract for Zinn Company's planned June debt offering of $10 million. What is the implied yield on the bond underlying the future's contract?

a) Use the given data to create a hedge against rising interest rates

b) Assume that the interest rates in general increase by 200 basis points. How well did your hedge perform?

c) What is a perfect hedge? Are any real-world hedges perfect? Explain 

Reference no: EM13294966

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