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

Terms of trade, Terms of Trade Doe Ltd must negotiate agreed terms of tr...

Terms of Trade Doe Ltd must negotiate agreed terms of trade with its customers in order to encourage prompter payment. These terms of trade may tender discounts for early paymen

Ownership and control related issue of debt, Q. Ownership and Control relat...

Q. Ownership and Control related issue of debt? Issuing equity is able to have ownership implications for a company particularly if the finance is raised by a placing or offer

The rectification entries, Show the rectification entries for the following...

Show the rectification entries for the following:                                        (10 marks) a.    The Sales account is undercast by Rs.15,000 b.    Goods returned by

Cumulative nature of the returns on the predilection shares, A changeable ...

A changeable instrument is deemed part liability and part equity. IAS 32 necessitate that each part is measured individually on initial recognition. The liability element is

Limitations of the five year period of analysis, Q. Limitations of the five...

Q. Limitations of the five year period of analysis? A number of restrictions to the analysis potentially arise - The approach doesn't take account of future benefits/costs a

The opening entries-executorship laws and accounts, The opening entries 1...

The opening entries 1. Assets of the estate or trust In both cases the various assets of the estate or trust are debited to appropriate accounts and credited to the Estate Ca

Journalize, wrote check to purchase law books for 2500 what 2 accounts

wrote check to purchase law books for 2500 what 2 accounts

Utility of Management accounting, Enumerate the scope and utility of manage...

Enumerate the scope and utility of management accounting.

Budget, the following information relates to Thomas limited who decide to c...

the following information relates to Thomas limited who decide to commence business on 01 January 2016 with R375000 cash: what is his budget for February, march, April?

State accounting, discuss the importance of state accounting to an effectiv...

discuss the importance of state accounting to an effective fiscal administration

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