QUESTION 1 (20 MARKS)

(a) Weston Inc. just agreed to pay $8,000 today, $10,000 in one year, and $15,000 in two years to a landowner to explore for, but not extract, valuable minerals. If the landowner invests the money at a rate of 5.5% compounded annually, what is the investment worth two years from today? (7 marks)

(b) You have an annuity of equal annual end-of-the-year cash flows of $500 that begin two years from today and last for a total of ten cash flows. Using a discount rate of 4%, what are those cash flows worth in today's dollars? (7 marks)

(c) What type of risk is being rated when bond agencies assign ratings to outstanding debt? What are the two main reasons for having bond agencies rate bonds? (6 marks