Question

11.2 Twin Oaks Health Center has a bond issue outstanding with a coupon rate of 7 percent and four years remaining until maturit 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?

Answer 1

Answer to Q#11.2 (First question in the list): Part-(a) Market yield rate, RATE 14% # of periods to maturity, NPER 4 Periodic coupon payment, PMT Maturity value at the end, FV $1,000 Periodic coupon type, TYPE Current value of the bonds $796.04 Part-(b) 7% 8 $35 $1,000 $70 Part-(c) 7% [Part-(b) & (c) = 14% / 2 = 7%] 40 [Part-(b) = 4 years x 2 = 8; Part-(c) = 20 years x 2 = 40] $35 [Part-(a) = $1,000 x 7% = $70; Part-(b) & (c) = $1,000 x 7% / 2 = $35] $1,000 [Par value] 0 = 0 if coupons paid at the end of each period; 1 if coupons paid at the beginning of each period. $533.39 [Ref: NOTE] 0 0 $791.00 NOTE: When a firm pays coupon interest semiannually, number of periods to maturity will be doubled and semiannual coupon payment will be half of annual coupon payment. For Part-(a), Current value of the bond is calculated using EXCEL FUNCTION PV(rate,nper,pmt,fv, type) where rate=14%; nper=4; pmt=-70; fv=-1000; Here, type=0; Here, value value for pmt & fv are negative as they denote cash inflows; type = 0 because coupons paid at the end of each year only. For Part-(b), Current value of the bond is calculated using EXCEL FUNCTION PV(rate,nper,pmt,fv,type) where rate=7%; nper=8; pmt=-35; fv=-1000; Here, type=0; Here, value value for pmt & fv are negative as they denote cash inflows; type = 0 because coupons paid at the end of each semiannual only.

For Part-(c), Current value of the bond is calculated using EXCEL FUNCTION PV(rate,nper,pmt,fv,type) where rate=7%; nper=40; pmt=-35; fv=-1000; Here, type=0; Here, value value for pmt & fv are negative as they denote cash inflows; type = 0 because coupons paid at the end of each semiannual only. D 2 Market yield rate, RATE 3 # of periods to maturity, NPER 4. Periodic coupon payment, PMT 5 Maturity value at the end, FV 6 Periodic coupon type, TYPE 7 Current value of the bonds Part-(a) 14% 4 =1000*7% $1,000 0 =PV(B2,B3,-B4,-B5,36) Part-(b) =14%/2 =4*2 =1000*7%/2 $1,000 0 =PV(C2,C3,-C4,-C5,C6) Part-(c) =14%/2 =20*2 =1000*7%/2 $1,000 0 =PV(D2,D3,-D4,-D5,D6)