Twin Oaks Health Center has a bond issue outstanding with a coupon rate of 7 per

Question

Twin Oaks Health Center has a bond issue outstanding with a coupon rate of 7 percent and four years remaining until maturity. The par value of the bond is $1000, and the bond pays interest annually. Determine the current value of the bond if present market conditions justify a 14 percent required rate of return. B. Now suppose Twin Oaks' four-year bond had semiannual coupon payments. What would be its currrent 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' four year bond had a seminannual 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.)

Explanation / Answer

The coupon on the bond = 0.07*1000 = $70 Cash flows are as follows: Year 0 to 3: $70 Year 4: $1070 Discounting these cash flows at 14%, the value of the bond = $796.04 With semiannual payments, cash flows are as follows: Periods 1 to 5: $70/2 = $35 Period 6: $1035 Discounting these cash flows at 7% semiannual rate, the value of the bond = $833.17 With a 20 year maturity, cash flows are as follows: Periods 1 to 39: $35 Period 40: $1035 Discounting these cash flows at 7% semiannual rate, the value of the bond = $533.39

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