a. It is January and Tennessee Sunshine is considering issuing $5 million in bonds in June to raise.

a. It is January and Tennessee Sunshine is considering issuing $5 million in bonds in June to raise capital for an expansion, and is concerned that interest rates will rise during the interim. Currently, TS can issue 20-year bonds at 7%, but interest rates are on the rise and Stooksbury is concerned that long-term interest rates might rise by as much as 1% before June. You looked online and found that June T-Bond futures are trading at 111-25. What are the risks of not hedging and how might TS hedge this exposure? In your analysis, consider what would happen if interest rates all increased by 1%. b. What is a swap? Suppose two firms have different credit ratings. Firm Hi can borrow fixed at 11% and floating at LIBOR + 1%. Firm Lo can borrow fixed at 11.4% and floating at LIBOR + 1.5%. Describe a floating versus fixed interest rate swap between firms Hi and Lo in which Lo also makes a “side payment” of 45 basis points to Firm L. Assume you have just been hired as a financial analyst by Tennessee Sunshine Inc., a mid-sized Tennessee company that specializes in creating exotic sauces from imported fruits and vegetables. The firm s CEO, Bill Stooksbury, recently returned from an industry corporate executive conference in San Francisco, and one of the sessions he attended was on the pressing need for companies to institute enterprise risk management programs. Because no one at Tennessee Sunshine is familiar with the basics of enterprise risk management, Stooksbury has as

 

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