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UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT

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

a. bond’s value

maturity, m

coupon rate, c

par value. Fr

formula c/ytm {1-1/1(1+ytm)^2m+Fr/1+ytm/2)^2m

ytm

10

12%

1000

7%

bond value

0.012/0.07 (1 – 1/1 /(1+0.07/2)^2 0 +

1000/(1+0.07/2)^20

=85.2686.

b. bond’s value =

0.12/0.1 3 (1- 1/1/1 +0.13/2)^20 + 1000/ 1

+0.13/2)^20

=258.776

c.for part a bonds value

0.012/0.07 (1 – 1/1 /(1+0.07/2)^6 + 1000/(1+0.07/2)^6=813.5326

for part b bonds value

0.12/0.1 3 (1- 1/1/1 +0.13/2)^6 + 1000/ 1 +0.13/2)^6=1000

INANCIAL MANAGEMENT

Chapter 6 — Debt Financing

000/(1+0.07/2)^6=813.5326

0/ 1 +0.13/2)^6=1000

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

;

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?

g

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. If the current rate of interest

is a 9 percent yield to maturity on this investment, what is the current price of the bond?

ANSWER

UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT

Chapter 6 — Debt Financing

PROBLEM 9

Consider a $1,000 par value bond with a 7 percent annual coupon. The bond pays interest

annually. There are nine years remaining until maturity. What is the current yield on the bond

assuming that the required return on the bond is 10 percent?

ANSWER

UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT

Chapter 6 — Debt Financing

PROBLEM 10

A corporate bond matures in 14 years. The bond has an 8 percent semiannual coupon and a par

value of $1,000. The bond is callable in five years at a call price of $1,050. The price of the bond

today is $1,075. What are the bond’s yield to maturity and yield to call?

ANSWER

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