# 20f408dd 12fd 4366 a7f3 ec508608c703 xls Ch 23 04 Build a Model

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```					20f408dd-12fd-4366-a7f3-ec508608c703.xls                                                      Ch 23-04 Build a Model

8/3/2003

Chapter 23. Ch 23-04 Build a Model

Problem 23-4. Use the information and data from Problem 23-2

Problem Inputs:
Size of planned debt offering =                              \$10,000,000
Anticipated rate on debt offering =                                 11%
Maturity of planned debt offering =                                   10
Number of months until debt offering =                                 7
Settle price on futures contract (% of par) =                 95.53125%
Maturity of bond underlying futures contract =                        20
Coupon rate on bond underlying futures contract =                     6%
Size of futures contract (dollars) =                            \$100,000

a. Create a hedge with the futures contract for Zinn Company’s planned June debt offering of \$10
million. What is the implied yield on the bond underlying the future’s contract?

Number of contracts needed for hedge =

Value of contracts in hedge =

Implied semi-annual yield =

Implied annual yield =

b. Suppose interest rates fall by 300 basis points. What is the dollar savings from issuing the debt at the
new interest rate? What is the dollar change in value of the futures position? What is the total dollar
value change of the hedged position?

Change in interest rate on debt offering (basis points) =                                 300

New interest rate on debt =
Value of issuing at new rate interest =
Dollar value savings or cost from issuing debt at the new rate =

New yield on futures contract =
Value of futures contract at new yield =
Dollar change in value of the futures position =

Total dollar value change of hedge =

c. Create a graph showing the effectiveness of the hedge if the change in interest rates, in basis points,
is: -300, -200, -100, 0, 100, 200, or 300. Show the dollar cost (or savings) from issuing the debt at the
new interest rates, the dollar change in value of the futures position, and the total dollar value change.

Michael C. Ehrhardt                                     Page 1                                               1/12/2011
20f408dd-12fd-4366-a7f3-ec508608c703.xls                                      Ch 23-04 Build a Model

Dollar    Dollar change
change in    in value of
Change in    cost/savings    futures    Total dollar value
rate         of issue     position     change of hedge
Base 300
-300
-200
-100
0
100
200
300

Michael C. Ehrhardt                                 Page 2                                 1/12/2011

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