Problem: Twin Oaks Health Center has a bond issue outstanding with a coupon rate of 7% and four years remaining until maturity. The par value of the bond is $1,000, and the bond pays interest annually.
Q1. Determine the current value of the bond if present market conditions justify a 14% required rate of return.
Q2. Supposing Twin Oaks's four-year bond had semiannual coupon payments. What would be its current value? (Assume a 7% semiannual rate of return. However, the actual rate would be slightly less than 7% because a semiannual coupon bond is slightly less risky than an annual coupon.)
Q3. Assuming that Twin Oak' bond had a semiannual coupon but 20 years remaining to maturity. What is the current value under these conditions? (Assume a 7% semiannual rate of return. However, the actual rate would be slightly less than 7%, although the actual rate would probably be greater than 7% because of increased price risk.)