INSTRUCTIONS:This question contains two (2) parts. Respond to both parts. In your answer, use bold text to label your response to each part (e.g.Part a):Your response...)

Part a):Define NPV and discuss its advantages and disadvantages, making reference to the Objective of the Firm and wherever possible using examples and equations to assist your answer. Your discussion should cover the decision rules for independent and mutually exclusive projects.

(5 marks)

Part b):Peter buys a bond with a face value of $100, a time to maturity of four years, a coupon of 4% pa with semi-annual payments and a yield of 3% pa. Fifteen months later, the Reserve Bank of Australia unexpectedly increases the cash rate. The yield on Peter's bond increases to 3.5% pa. Peter sells the bond. Calculate the buying and selling price of the bond.