The Zinn Company plans to issue $20,000,000 of 10-year bonds in March 2018to help finance a new research and development laboratory. Assume that interest ratefutures maturing in March 2018 are selling for 125–145. It is now early June, and the currentcost of debt to the high-risk biotech company is 11%. However, the firm’s financial manageris concerned that interest rates will climb even higher in coming months.a. Create a hedge against rising interest rates.b. Assume that interest rates generally increase by 200 basis points. How well did yourhedge perform?c. What is a perfect hedge? Are most real-world hedges perfect? Explain.
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:
The Zinn Company plans to issue $20,000,000 of 10-year bonds in March 2018
to help finance a new research and development laboratory. Assume that interest rate
futures maturing in March 2018 are selling for 125–145. It is now early June, 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.
a. Create a hedge against rising interest rates.
b. Assume that interest rates generally increase by 200 basis points. How well did your
hedge perform?
c. What is a perfect hedge? Are most real-world hedges perfect? Explain.
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