Stohs Semiconductor Corporation plans to issue$50 million of 20-year bonds in 6 months. Theinterest rate would be 9% if the bonds were issuedtoday. How can Stohs set up a hedge against anincrease in interest rates over the next 6 months?Assume that 6-month futures sell for 100’220.
Debenture Valuation
A debenture is a private and long-term debt instrument issued by financial, non-financial institutions, governments, or corporations. A debenture is classified as a type of bond, where the instrument carries a fixed rate of interest, commonly known as the ‘coupon rate.’ Debentures are documented in an indenture, clearly specifying the type of debenture, the rate and method of interest computation, and maturity date.
Note Valuation
It is the process to determine the value or worth of an asset, liability, debt of the company. It can be determined by many processes or techniques. Many factors can impact the valuation of an asset, liability, or the company, like:
Stohs Semiconductor Corporation plans to issue
$50 million of 20-year bonds in 6 months. The
interest rate would be 9% if the bonds were issued
today. How can Stohs set up a hedge against an
increase in interest rates over the next 6 months?
Assume that 6-month futures sell for 100’220.
Hedging means to have protection from the risk. This risk can be the risk that arises due to change in interest rates, change in prices or change in other conditions. Hedging can be done by engaging in derivatives.
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