A capital goods company is considering a major factory investment, half of which is paid today, and half one year from now. The company wants to hedge its interest rate risk for financing the investment, and lock in today the interest rate for a one-year loan it expects to take in a year from now. Assume a 2-year zero-coupon bond is trading at a yield to maturity of 8% per year, and the one year spot rate today is 7%. What would be the interest rate the company can without uncertainty) agree on today for a loan it takes one year from now? A. 8.1% B. 8.9% C. 9.0% D. 9.2% E. 9.3%

A capital goods company is considering a major factory investment, half of which is paid today, and half one year from now. The company wants to hedge its interest rate risk for financing the investment, and lock in today the interest rate for a one-year loan it expects to take in a year from now. Assume a 2-year zero-coupon bond is trading at a yield to maturity of 8% per year, and the one year spot rate today is 7%. What would be the interest rate the company can without uncertainty) agree on today for a loan it takes one year from now? A. 8.1% B. 8.9% C. 9.0% D. 9.2% E. 9.3%

Entrepreneurial Finance

6th Edition

ISBN:9781337635653

Author:Leach

Publisher:Leach

Chapter7: Types And Costs Of Financial Capital

Section: Chapter Questions

Problem 1EP

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