1. Smith receives $400 in 1 year, $800 in 2 years, $1,200 in 3 years and so on until the final payment of $4,000. Using an effective interest rate of 6%, determine the present value of these payments at time 0.
2. Suppose that XYZ Corporation has previously issued corporate bonds, preferred stock and common stock. Now, the firm has just received a change in its bond rating to AA from AAA. Will this mean that a new bond issue by the firm will pay a higher coupon rate than firms with a AAA rating for the same type of bond issue?