Question

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?

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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.
Productive opportunities are profitable investment opportunities. As more, and potentially better, productive opportunities increase in a market, lenders can charge higher interest rates because they can identify and direct their investments to the higher profitable ones.
Time preference for consumption refers to the time period a lender is willing to forgo the use of his money. Lenders with low time preferences for consumption will charge or require lower interest rate because they do not need their funds for consumption until a long period of time passes. Lenders with high time preferences will charge higher interest rates because they want a higher return for delaying the consumption of their funds.
Risk refers to the possibility that the borrower will not be able to repay the loan. Borrowers who have poor credit or are entering into a business venture with a high potential of failure, will be required to pay higher interest rates. Business ventures with lower risk of failure or borrowers with good credit will pay lower rates. The higher interest rates help to compensate the lender for the potential of loss on the loan.
Inflation refers to the rising of prices from one period to another. As inflation occurs future dollars are worth less than dollars in hand right now. Interest rates go higher as inflation occurs to protect the lender’s purchasing power....

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