Healthcare finance/ Cost of Capital

Healthcare cost of financing Name: Institution: Date: The issuing of bonds relates to the loaning of funds by investor to the bond issuer , with the bond issuer paying all the money after maturity date, the investor also receives periodic interest payments from the bond issuer. The main advantage of bond financing for hospitals is that there are low interest rates for payment, which makes it an attractive option for hospitals. Furthermore, hospitals can obtain tax-exempt bond through the proceeds of municipal bonds issued (Gapenski, 2010). Thus, it is a cheap source of capital for hospitals in comparison to other financing methods. The hospital will access this source of income, as the funds will be used for a capital project, in building a cancer research wing. For the investor, investing in bonds is a safer bet than stocks, which may plunge in case of a market shock. Bonds have predictable payment amounts, as the investor receives interest on a regular basis as well as the face value amount at the maturity date. Thus, investing in bonds is safer than stocks as the borrower is obligated to pay the amount at the maturity date. In any case, the terms of these debt securities are clearly stipulated. In essence, there is less price volatility for this fixed income instruments, as opposed to stocks. Therefore, it is unlikely that an investor will lose money invested in bonds. For hospitals, bonds increase the level of debts in the organization, as bonds are a form of debt security. In essence, there is an increased financial risk due to use of bonds as opposed to equity for companies. With use of stocks, there is change in the percentage of ownership, but there are no increased debt obligations. Thus, bond issuance is accompanied with increased debt and debt risk for hospitals, the interest is repayable as per the stipulatated period, and the face value amount is due by the time of maturity. In case of default then the hospital runs the risk of being unworthy of credit facilities in the long term, worsening the chance for debt financing that may be available in future. In spite of the predictability in periodic payments of interest, the prices of bonds could become volatile depending on rating of the issuer credit rating agencies. Thus, a sudden downgrade of credit worthiness results to a sudden drop in the market price of the bond leaving the investors at a disadvantage. There is an element of uncertainty because of the activities of credit rating agencies, which may fail to identify potential threats to the financial system (Maurice, 2012). For instance, the global down turn led to defaults of mortgage backed securities, and though the debt rating was good, it suddenly led to loss of confidence in the capacity of rating agencies to predict accurately the market. The issue price of a bond is typically close to the par value, ...