6. An investor borrows a principal of 1,000,000 and agrees to an interest-only repayment at a rate of 5% p.a., in equal quarterly installments, paid in arrears for 10 years. After 10 years the principal is paid back with a lump payment. The investor uses part of the principal to buy 200,000 nominal of 10-year government bonds, paying semi-annual coupons at a rate of 4% p.a. and producing a yield of 3.5% p.a. effective. Bonds are redeemed at par after 10 years. The remaining portion of the principal (denoted by P) is used to purchase properties that produce annual rental income at a rate of 4% of their initial value P for the first 5 years and, subsequently, at a rate of 5% of their initial value P. Rent is payable monthly in advance. = (a) (4 marks) Let in 4% p.a. be the annual effective rate applied to liabilities. Evaluate the present value at time zero of the total liability. (b) (4 marks) Compute the present value at time zero of the portion of principal invested in bonds and deduce the investment in properties P