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Question 1 (12 marks)

You will receive equal payments of $1000 per year for each of the years 5 through 10. You will not receive any payments in Year 1 through 4. The interest rate is 3% for the first 4 years and 5% for the next 6 years. What is the present value of these future payments? Demonstrate using both Future Value Annuity and Present Value Annuity approaches. Will you get different answers for each approach? (12 marks)

Question 2 (14 marks) Great Barrier Reef Premier Investments is issuing a 5-year 10% Coupon Bond that has a face value of $1,000 and a yield to maturity of 8%.

a) If the coupons are paid annually, what is the expected price of this Bond today? (4 marks)

b) How will the price of the Bond change if the coupons are paid every half year? (3 marks)

c) How will the price of the Bond change if the coupons are paid every quarter? (3 marks)

d) What is the effect of frequency of coupon payments on Bond prices? (4 marks)