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As the treasurer of Fun R' Us, Inc., you plan to issue $20 million face value of 20 year, 8% coupon corporate bonds in three months.
As the treasurer of Fun R’ Us, Inc., you plan to issue $20 million face value of 20 year, 8% coupon corporate bonds in three months. There exists a Treasury Bill futures contract with a delivery date the day before you plan to issue the debt. You are concerned about interest rates over the next three months. To manage this risk, should you buy or sell the (appropriate number of) contact? Can you eliminate interest rate risk using this futures contract? Why or why not?