Problems
11.1. 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 to7 percent. What would be the bonds' value?
b. Suppose that two years after the bonds were issued, the required interest rate rose to 13 percent. What would be the bonds' value?
c. What would he 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?
11.2. 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's 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 coupon bond is slightly less risky than an annual coupon bond.)
c. Assume that Twin Oaks's 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.)
11.3. 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?
11.4. 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 five years, Bond M has a 15-year maturity, and Bond L matures in 30 years.
a. What is the value of each 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?
11.5. 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.
If the current market price is $1,104?
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.
11.6. Is this statement true or false? "The values of outstanding bonds change whenever the going rate of interest changes. In general, short-term interest rates are more volatile than long-term rates, so short-term bond prices are more sensitive to interest rate changes than are long-term bond prices." Explain your answer.
11.9. Orange District Hospital issued a 30-year, 10 percent annual coupon bond (par value $1,000) two years ago. The bond now has 28years remaining to maturity and sells for $1,400. The bond has a call provision that allows the hospital to call the bond in ten years at a call price of $1,100. If an investor expects a call and requires a 6.5 percent rate of return, will the investor be likely to purchase the bond? Explain your answer.
Case 6.2: Big Valley Hospital
Key Concept - Bond issuance valuation and bond interest expense
Questions
1. How much cash will big Valley Hospital get from issuing the bonds?
2. What will be the amount of Year 1 interest expense in the financial statements for the bonds?
3. What journal entry would be required to record interest expense for Year 1?