Determine the transaction the firm should conduct on january

Assignment Help Financial Management

Reference no: EM131323581

On January 31, a firm learns that it will have additional funds available on May 31. It will use the funds to purchase $5,000,000 par value of the APCO 9 1/2 percent bonds maturing in about 21 years.

Interest is paid semiannually on March 1 and September 1. The bonds are rated A2 by Moody's and are selling for 78 7/8 per 100 and yielding 12.32 percent. The modified duration is 7.81. The firm is considering hedging the anticipated purchase with September T-bond futures. The futures price is 71 8/32. The firm believes the futures contract is tracking the Treasury bond with a coupon of 12 3/4 percent and maturing in about 25 years. It has determined that the implied yield on the futures contract is 11.40 percent and the modified duration of the contract is 8.32.

The firm believes the APCO bond yield will change 1 point for every 1-point change in the yield on the bond underlying the futures contract.

a. Determine the transaction the firm should conduct on January 31 to set up the hedge.

b. On May 31, the APCO bonds were priced at 82 3/4. The September futures price was 76 14/32. Determine the outcome of the hedge.

Reference no: EM131323581

Questions Cloud

Show effect of such a subsidy on welfare of various groups : According to Oxfam, the 2002 U.S. cost of production was $3.08 per bushel, but the export price was $2.69 per bushel, with the difference reflecting an export subsidy of 39¢ per bushel. The U.S. exported 5.3 metric tons. Use graphs to show the eff..

Design a heat transfer computer design project : Heat Transfer ME 3360/5360:Your job is to design this wall. This consists of picking a material and determining the overall thickness, labeled with L in the figure. Assume that the thermal conductivity is uniform. You can only choose solid materi..

Questions and topics for discussion : Please respond to ONE of the below questions in detail. These questions are taken from Sam Kean's "Questions and Topics for Discussion". Your response needs to be 1-2 pages long, or approximately 700-900 words. Consider the question and articulat..

Product development or management process for the innovation : How can the risks of innovation be addressed and/or managed and how can organizational alliances be used to support implementation?

Determine the transaction the firm should conduct on january : On May 31, the APCO bonds were priced at 82 3/4. The September futures price was 76 14/32. Determine the outcome of the hedge.

Research on sibling influence on delinquency : Research on sibling influence on delinquency indicates: Rudy rarely cries when his mother leaves the room and shows no reaction when his mother picks him up. Rudy is displaying signs of attachment

Evaluate the level of responsibility of the company : Evaluate the level of responsibility of the company in terms of the effectiveness of the response to the security breach. Provide support for your rationale.

What transaction should the firm make on july 1 : What transaction should the firm make on July 1?- On August 30, the bond was selling for 101 12/32 and the futures price was 77 5/32. Determine the outcome of the hedge.

Generate three examples of nominal variables : Generate three examples of nominal variables and three examples of quantitative variables that were not mentioned in the chapter.

User Account

All Pages