Healthcare Finance

Assignment 3

From Chapter 11

Answer the following Questions from pages 404-405:

Questions 11.1, 11.2, 11.4, 11.6, 11.9 (3 points each)

11.1

The four fundamental factors that affect the supply of and demand for investment capital-which affect interest rates-are productive opportunities, time preference for consumption, risk, and inflation. Explain how each of these factors affects the cost of money.

11.2

The interest rate required by investors on a debt security can be expressed by the following equation:

Interest rate = RRF + IP + DRP + LP + PRP + CRP

Define each term of the equation, and explain how it affects the interest rate.

11.4

Briefly describe the following types of debt:

a. Term loan

b. Bond

c. Mortgage bond

d. Senior debt; junior debt

e. Debenture

f. Subordinated debenture

g. Municipal bond

11.6

a. 1. What are the three primary bond rating agencies?

2. What do bond ratings measure?

3. How do investors interpret bond ratings?

4. What is the different between and A-rated bond and a B-rated bond?

b. 1. Why are bond ratings important to investors?

2. Why are ratings important to businesses that issue bonds?

11.9

a. What is interest rate risk?

b. What is price risk?

c. What is reinvestment rate risk?

Do the following problems from pages 405-407:

Problems 11.1, 11.3, 11.4, 11.6 (6 points each)

11.1

Assume Venture Healthcare sold bonds that have a 10-year maturity, a 12 percent coupon rate with annual payments, and a $1,000 par value.

a. Suppose that two year after the bonds were issued, the required interest rate fell to 7 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 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?

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%, 10%, and 15%?

b. Why is the price of Bond L more sensitive to interest rate changes that the price of Bond S?

11.6

Six years ago, Bradford Community Hospital issued 20-year municipal bonds with a 7% 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?

**Subject Business Financial Accounting**