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

What do you mean by reasonable assurance, Q. What do you mean by Reasonable...

Q. What do you mean by Reasonable Assurance? Reasonable Assurance - Management's assessment of effectiveness of internal control over financial reporting is expressed at the le

Situational Decsisions, Your Company makes 42,000 units per year of a part ...

Your Company makes 42,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows: Direct material $15.00 Direc

Powers of trustee-rights and duties of trustee, Powers of trustee (A) ...

Powers of trustee (A) Of his own initiative, he may: 1.    Sell and transfer any part of the bankrupt's property; 2.    Gives receipts for money received; 3.    Take all n

Retirement benefits and why it is shown in annual report, Retirement benefi...

Retirement benefits 1)      Provident fund and family pension: a.       Contribution to PF and PPF are provided for and payments in respect thereof are made to the relevant

Statute of limitations, Statute of Limitations - This sets out the period w...

Statute of Limitations - This sets out the period within that actions may be brought upon claims or within which rights may be enforced. As it concerns to tax returns, statute of l

determine the hibor , The following are the three-month HIBOR and three-ye...

The following are the three-month HIBOR and three-year EFN futures prices for September 2010 contracts.   a Determine the HIBOR in three-months for settling the futures

Interest expense, April 2014 Notepayable $9,825,000 was issued. First due i...

April 2014 Notepayable $9,825,000 was issued. First due is April 1,2015. 6% interest erroneously expensed a full year''s interest

Calculate the operating cash flow, You are evaluating a project which costs...

You are evaluating a project which costs $720,000, has a four-year life, and no salvage value. Depreciation is straight-line and the half year rule does not apply. Sales are projec

Accumulation accounts for minors-trusts laws, ACCUMULATION ACCOUNTS FOR MIN...

ACCUMULATION ACCOUNTS FOR MINORS   (a) Income accumulations : When property is left in trust for minors, the income earned for the period will be divided equally or according t

Show the basis of weightings, Q. Show the Basis of weightings? (i) Both...

Q. Show the Basis of weightings? (i) Both costs of capital (Ke and Kd) as well as the WACC have been calculated using current   ex-dividend (ex-interest) market values rather t

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