Twin oaks health center has a bond issue outstanding

9/1/2014 UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT Chapter 6 -- Debt Financing PROBLEM 1 Assume Venture Healthcare sold bonds that have a ten-year maturity, a 12 percent coupon rate with annual payments, and a $1,000 par value. a. Suppose that two years after the bonds were issued, the required interest rate fell to 7 percent. What would be the bond's value? b. Suppose that two years after the bonds were issued, the required interest rate rose to 13 percent. What would be the bond's value? c. What would be the value of the bonds three years after issue in each scenario above, assuming that interest rates stayed steady at either 7 percent or 13 percent? ANSWER UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT Chapter 6 -- Debt Financing PROBLEM 2 Twin Oaks Health Center has a bond issue outstanding with a coupon rate of 7 percent and four years remaining until maturity. The par value of the bond is $1,000, and the bond pays interest annually. a. Determine the current value of the bond if present market conditions justify a 14 percent required rate of return. b. Now, suppose Twin Oaks' four-year bond had semiannual coupon payments. What would be its current value? (Assume a 7 percent semiannual required rate of return. However, the actual rate would be slightly less than 7 percent because a semiannual bond is slightly less risky than an annual coupon bond.) c. Assume that Twin Oaks' bond had a semiannual coupon but 20 years remaining to maturity. What is the current value under these conditions? (Again, assume a 7 percent semiannual required rate of return, although the actual rate would probably be greater than 7 percent because of increased price risk.) ANSWER UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT Chapter 6 -- Debt Financing PROBLEM 3 Tidewater Home Health Care, Inc., has a bond issue outstanding with eight years remaining to maturity, a coupon rate of 10 percent with interest paid annually, and a par value of $1,000. The current market price of the bond is $1,251.22. a. What is the bond's yield to maturity? b. Now, assume that the bond has semiannual coupon payments. What is its yield to maturity in this situation? ANSWER UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT Chapter 6 -- Debt Financing PROBLEM 4 Pacific Homecare has three bond issues outstanding. All three bonds pay $100 in annual interest plus $1,000 at maturity. Bond S has a maturity of 5 years, Bond M has a 15-year maturity, and Bond L matures in 30 years. a. What is the value of these bonds when the required interest rate is 5 percent, 10 percent, and 15 percent? b. Why is the price of Bond L more sensitive to interest rate changes than the price of Bond S? ANSWER nd 15 percent? UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT Chapter 6 -- Debt Financing PROBLEM 5 Minneapolis Health System has bonds outstanding that have four years remaining to maturity, a coupon interest rate of 9 percent paid annually, and a $1,000 par value. a. What is the yield to maturity on the issue if the current market price is $829? b. If the current market price is $1,104? c. Would you be willing to buy one of these bonds for $829 if you required a 12 percent rate of return on the issue? Explain your answer. ANSWER UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT Chapter 6 -- Debt Financing PROBLEM 6 Six years ago, Bradford Community Hospital issued 20-year municipal bonds with a 7 percent annual coupon rate. The bonds were called today for a $70 call premium--that is, bondholders received $1,070 for each bond. What is the realized rate of return for those investors who bought the bonds for $1,000 when they were issued? ANSWER UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT Chapter 6 -- Debt Financing PROBLEM 7 Regal Health Plans issued a ten-year, 12 percent annual coupon bond a few years ago. The bond now sells for $1,100. The bond has a call provision that allows Regal to call the bond in four years at a call price of $1,060. The par value of the bond is $1000. a. What is the bond's yield to maturity? Assume the bond is held to maturity (10 years). b. What is the bond's yield to call? Assume the bond is held to the call date (4 years). ANSWER UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT Chapter 6 -- Debt Financing PROBLEM 8 Rex Healthcare recently issued a bond with a 30-year maturity, an annual coupon rate of 10 percent, a face value of $1,000, and semiannual interest payments.