USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)

question 94

Multiple Choice

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Assume you are the Treasurer for the Johnson Pharmaceutical Company and in late July 2004, the company is considering the sale of $500 million in 20-year bonds that will most likely be rated the same as the firm's other debt issues. The firm would like to proceed at the current rate of 8.5%, but you know that it will probably take until November to bring the issue to market. Therefore, you suggest that the firm hedge the pending issue using Treasury bond futures contracts, which each represent $100,000.

-Refer to Exhibit 15.2. How you would go about hedging the bond issue?

• A) buy 5,000 contracts
• B) buy 50,000 contracts
• C) sell 5,000,000 contracts
• D) sell 5,000 contracts
• E) sell 500 contracts

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Definitions:

Expense Accounts

Accounts used to record all expenditures incurred by a business during an accounting period, excluding costs of goods sold.

Debits

An accounting entry that results in either an increase in assets or a decrease in liabilities on a company's balance sheet or in an expense on the income statement.

Debt Ratio

A financial ratio that compares the amount of debt a company has to its total assets.

Risk

The potential for loss or the chance that an investment's actual return will differ from the expected outcome.