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Question 1

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 these bonds when the required interest rate is 5 percent, 10 percent, and 15 perrcent?

b. Why is the price of Bond L more sensitive to interest rate changes than the price of Bond S?

Question 2

Six years ago, Bradford Community Hospital issued 20-year municipal bonds with a 7 percent annual coupon rate. The bonds were called today for a $70 call premium-that is, bondholders received $1,070 for each bond. What is the realized rate of return for those investors who bought the bonds for $1,000 when they were issued?

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