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 net carrying amount, On June 30, 2011, Omara Co. had outstanding 8%, $...

On June 30, 2011, Omara Co. had outstanding 8%, $3,000,000 face amount, 15-year bonds maturing on June 30, 2021. Interest is payable on June 30 and December 31. The unamortized bal

Closing entries, Closing Entries: Expenses Below is a list of accounts with...

Closing Entries: Expenses Below is a list of accounts with corresponding ending balances. Account: Account Balance a.Insurance Expense: $1,300 b.Cash: 750 c.Accounts Receivable: 4,

Annual coupon payment, Arnot International's bonds have a present market pr...

Arnot International's bonds have a present market price of $1,250. The bonds have an 11% annual coupon payment, a $1,000 face value, and 10 years left until maturity. The bonds may

Corporate finance, Calculate the market value of Renowned Cola''s debt at y...

Calculate the market value of Renowned Cola''s debt at year-end 2005. What is the book value of debt? Why do usually use market or book values for debt? Explain.

Amortization of patents, Nieland Industries had one patent recorded on its ...

Nieland Industries had one patent recorded on its books as of January 1, 2014. This patent had a book value of $288,000 and a remaining useful life of 8 years. During 2014, Nieland

Binary coded decimal, Binary Coded Decimal BCD stands for Binary Coded ...

Binary Coded Decimal BCD stands for Binary Coded Decimal. The information given to the computer is stored temporarily before it is processed.  Consider a number 827. The bin

Explain why the operating cycle, The Operating Cycle Two Wheeler Cycle Shop...

The Operating Cycle Two Wheeler Cycle Shop buys all of its bikes from one manufacturer, Baxter Bikes. On average, bikes are on hand for 45 days before Two Wheeler sells them. The c

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