Answer:
(a) $900,000 semi annually
(b) $706,200
Explanation:
a).Total Period to issue 20 year semi-annual bonds=20×2=40
The Cost Of Debt to Company is Increase by = Value Of Bonds × Interest Rate × Semi Annual Year
= $120,000,000 × 1.5% × 1/2
= $900,000 semi annually
b). Consider face value of treasury bond is = $100
Future contract that are currently trading at 129.2, its means yield to maturity is less than coupon rate, according to this we can say that Required rate of return is less than coupon rate.
According to this if interest rate increase by 1.5%, bond price will be increase by 1.5%
Bond Traded at = $129.2 × 1.5% + $129.2
= 1.938 + 129.2
= $131.138
Jordon Earn From Future = Future Contract × (Bond Traded - Currently Trading)
= $100,000 × ( $131.138 - $129.2)
= $193,800
If hedge, net outcome will be = $900,000 - $193,800
= $706,200
