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Cases in Healthcare Finance, 5th Edition

 


 

Copyright © 2014 by FACHE

 


 

CASE 14 QUESTIONS

 


 

PACIFIC HEALTHCARE (A)

 

Bond Valuation

 

1. To prepare for the meeting, create a summary of the yields of each bond by completing the table shown

 

in Exhibit 14.2. Remember that the YTM of each bond is assumed to be the required rate of return of

 

each bond and that the semiannual YTM must be multiplied by two to get the stated (nominal) YTM.

 

2. At the meeting, a committee member asks ?The two 25-year bonds have the same maturity date, so

 

why do the current yields and capital gain yields of these bonds differ?? What do you reply to the

 

committee member? (Hint: No additional calculations are required.)

 

3. The committee chair states that it is important for Pacific to understand the market for its debt. ?I

 

understand that Pacific's bonds are held primarily by tax-paying investors, so I want to know whether

 

they prefer one of the 25-year bonds over the other and why.? (Hint: No additional calculations are

 

required.)

 

4. The committee chair states that interest rates change over time which causes interest rate risk. She

 

asks you to identify the bond that has the most price risk. (Hint: For each bond, compare the values at

 

interest rates of 6, 8, 10, 12, and 14 percent.)

 

5. The chair then asks you to identify the bond that has the greatest reinvestment rate risk for an investor

 

who has an investment horizon (or expected holding period) of 25 years. Is there a type of bond the

 

investor could buy to eliminate reinvestment rate risk? (Hint: No additional calculations are required.)

 

6. A committee member suspects that some of Pacific's bond holders are short-term speculators as

 

opposed to long-term investors. He believes that interest rates are going to fall from current levels and

 

asks you which Pacific bond would speculators buy to maximize short-term capital gains and why. (Hint:

 

No additional calculations are required.)

 

7. The Chair comments that the 15-year and both 25-year bonds are callable five years from today at

 

$1,050 and asks you for the yield-to-call on each of the three bonds.

 

8. Finally, the Chair states that most bond market analysts believe that interest rates will remain at the 10

 

percent level for the next several years. She asks you whether Pacific should consider calling any of its

 

bonds and why. (Hint: No additional calculations are required.)

 

9. In your opinion, what are three key learning points from this case?

 


 

11/18/2013

 


 

 


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