Step 1

Pacific Homecare has three bond issues outstanding. All three bonds pay $100 in annual interest plus $1000.00 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 they required interest rate is 5%, 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?

Step 2

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 $1000.00 and the bonds pays interest annually.

Determine the current value of the bond if present marker conditions justify a 14% required rate of return.

Now suppose twin oaks four year bond semiannual coupon payments. What would be its current value? (Assume 7 % semiannual required rate of return). However the actual rate would be less slightly less than 7% because a semiannual required rate of return.

Twin has a semiannual coupon but 20 years remaining to maturity. What is the current value under these conditions? Again assume a 7% semiannual required rate of return although the actual rate would be probably be greater than 7% because of increased price risk.