QuickCare, a no-for-profit healthcare system that owns and operates 34 walk-in clinics incentral Florida, is planning to build and operate ten more clinics. They estimate that land,construction, and startup costs for the clinics will be $100,000,000, and they plan to raise thefunds by issuing tax-exempt (municipal) bonds with $1,000 par value per bond. Furthermore,their investment bankers believe that two maturities are most attractive at this time: 7-yearbonds that would require a fixed interest rate of 3 percent and 30-year bonds with a fixed rateof 4.5 percent. You have been asked by the CEO to make a recommendation as to whichmaturity to use. Also, he is interested in investing personally in the bonds and wants to knowwhat would happen to the value of each bond if interest rate rise by 1 percentage point duringthe first year of issue and the bonds had remaining maturities of 6 years and 29 yearsrespectively. (Experts predict that it is more likely that interest rates will increase in the futurerather than decrease.) Finally, he would like to know what total return he would earn duringthe first year if the interest rate increase took place. Perform the analysis on a per bond basis.Also, for convenience, assume the bonds have annual coupons and that at time zero (today)they can be purchased at par (YTM=Coupon Rate).
Calculate the rate of return (total yield) for both bonds after one year if interest rates increaseto 4% on the 7-year bond and 5.5 percent on the 30-year bond.