What is the duration of this bond?

What is the duration of this bond?

Chapter 15 — Working Capital ManagementPROBLEM 1On a typical day, Park Place Clinic writes $1,000 in checks. Itgenerally takes four days for those checks to clear. Each day theclinic typically receives $1,000 in checks that take three days toclear. What is the clinic’s average net float?
PROBLEM 2Drugs ‘R Us operates a mail order pharmaceutical business on theWest Coast. The firm receives an average of $325,000 in paymentsper day. On average, it takes four days for the firm to receivepayment, from the time customers mail their checks to the time thefirm receives and processes them. A lockbox system that consists often local depository banks and a concentration bank in SanFrancisco would cost $6,500 per month. Under this system,customers’ checks would be received at the lockbox locations oneday after they are mailed, and the daily total would be wired tothe concentration bank at a cost of $9.75 each. Assume that thefirm can earn 10 percent on marketable securities and that thereare 260 working days and hence 260 transfers from each of the tenlockbox locations per year.
What is the total annual cost of operating the lockboxsystem?What is the dollar benefit of the system to Drugs’R Us?Should the firm initiate the lockbox system?
PROBLEM 3Suppose one of the suppliers to Seattle Health System offersterms of 3/20, net 60.
When does the system have to pay its bills from thissupplier?What is the approximate cost of the costly trade credit offeredby this supplier? (Assume 360 days per year.)
Chapter 18 — Financial Risk ManagementPROBLEM 1Pleasant View Nursing Home estimates that its building will lastanother ten years and then it will need to be replaced. The homeestimates that the capital cost of a new building in ten years willbe $10 million. The home plans to set aside a portion of anendowment fund in government bonds to ensure it has sufficientfunds to pay for the replacement of the building. If we assume that theyield curve is horizontal, the current interest rate on allTreasury securities is 9 percent, and the type of security used forthe building fund is Treasury bonds, then the present value of $10million discounted back ten years at 9 percent is $4,224,108.Suppose interest rates change from the current 9 percent rateimmediately after the nursing home has bought the Treasury bonds.What would be the value of the bonds at the end of ten years undereach of the following situations? (For simplicity, assume annualcoupons).
The home buys $4,224,108 of 9 percent, ten-year maturity bonds;rates fall to 7 percent immediately after the purchase and remainat that level; rates rise to 12 percent.The home buys $4,224,108 of 9 percent, 40-year maturity bonds;rates fall to 7 percent immediately after the purchase and remainat that level; rates rise to 12 percent.
PROBLEM 2Pleasant View Nursing Home has decided to immunize its portfolioagainst interest rate and reinvestment rate risk by buying a bondthat has a duration equal to the years until the funds will beneeded (approximately ten years from today). The home isconsidering a 20-year, 9 percent annual coupon bond bought at itspar value of $1,000.
What is the duration of this bond?If the nursing home purchases $4,224,000 worth of this bond,what would be the value of the bonds at the end of the durationperiod if interest rates fall to 7 percent immediately after thepurchase and remain at that level? If interest rates rise to 12percent?

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