The Aleander Company plans to issue $10,000,000 of 10-year bonds at par next June, with semiannual interest payments. The company’s current cost of debt is 10 percent. However, the firm’s financial manager is concerned that interest rates will increase in coming months, and has decided to take a short position in U. S. government t-bond futures. See the settlement data below for t-bond futures. (Note: One standard futures contract is $100,000)
Delivery
Month Settlement
(1) (5)
Dec 102-17
Mar 101-01
June 100-12
a. Calculate the present value of the corporate bonds if rates increase by 2 percentage points.
b. Calculate the gain or loss on the corporate bond position.
