I need you to answer the questions on the attachment. Please show your work.
Cases in Healthcare Finance, 5th Edition
Copyright © 2014 by FACHE
CASE 14 QUESTIONS
PACIFIC HEALTHCARE (A)
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
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?
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