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Jordan Enterprises plans to issue $120,000,000 of 20-year semi-annual bonds in September to help finance...

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Accounting

Jordan Enterprises plans to issue $120,000,000 of 20-year semi-annual bonds in September to help finance a new factory. It is January, and the current cost of debt to the company is 9 percent. However, the firms financial manager is concerned that interest rates will climb by 1.5 percent in a current high inflation environment.

a) What would be the outcome if interest rates climb by 1.5 percent and Jordan did not hedge its position?

b) If Jordan hedges the bond issue, it will use the Treasury bond ($100,000) futures contracts that are currently trading at 129-2. What would be the outcome if Jordan hedges its position and interest rates climb by 1.5 percent on the Treasury bond as well?

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