Part 1
The winning amount of
lottery is $11,000,000. If we pay it in 26 equal installments on an annual
basis, then one installment will equal to 11,000,000/26 = $423,076.92. An ideal
option is to start giving the installments as soon as possible.
The interest rate is 9 percent, and the effective annual interest rate
will be ((1+r)12 - 1). Here r means 9 percent, which is compounded 12 times
because there are a total of twelve months in a year.
The effective annual interest rate will be equal to ((1+0.09)12 - 1) = 0.0938. This can also be written as
9.38%, which is the annual discount rate.
The
current value of installments = Installment0 +
Installment1/(1+r)1 + Installment2/(1+r)2 +
................. + Installment24/(1+r)24 + Installment25/(1+r)25
Here Installmentn means the
installment at a given time (n). In order to ease the whole process, we
included the last year as the installment is supposed to start immediately.
The
present or current value of installments is 423076.92 + 423076.92/(1 + 0.0938)1 + 423076.92/(1 + 0.0938)2 + .................................. +
423076.92/(1 + 0.0938)24 +423076.92/(1
+ 0.0938)25
Answer = $4,453,793.24
Part 2
AAA bond ratings can be regarded as the
safest bond ratings; they have lesser number of defaults than any other set of
bonds (J, 2015). Here the word “default” means that an investor does not get
the amount they are promised about. AAA bonds belong to the investment grade
class, with their operating environment quite stable and attractive. A core
benefit of these bonds is that they have a low default character. Another
benefit is that they give more profitability. One disadvantage is that the
investor will be subject to the low coupon rate, which is offered by AAA bonds
because of their low risks inherent.
BBB bonds are considered safer and better
than AAA bonds (2016). They can also be regarded as investment grade bonds in
which the operating environment is quite sustainable and good. However, the
operating environment of BBB bonds is not as good and stable as is the
operating environment of AAA bonds. BBB bonds provide investors with a better
coupon rate than AAA bonds because of their high-risk premiums.
CCC bonds represent a risky category of
bonds; they are widely known as Junk bonds and have a speculative grade,
indicating that the defaults are of a significant number. However, high
profitability is what investors can have, but they are not repaid any interest.
If the time is good, then the CCC rate firms give high yields because of the
involvement of high-risk premiums.
D bonds give higher and better default rates
than those of CCC bonds. They are often regarded as risky junk bonds. D bonds
are able to attract a large number of investors because of high coupon values
and their risk premiums are better than other bonds. Companies may have to face solvency and
liquidity issues, such as financial institutions or banks are not allowed to
invest in D bonds.
References
J, M. R. (2015). Part XIII
Extinction of Obligations, 52 Assignment. The Financial Obligation in
International Law. doi:10.1093/law/9780198736387.003.0052
Contents: European Financial
Management 5/2016. (2016). European Financial Management, 22(5),
747-747. doi:10.1111/eufm.12077
Assignment of Financial Means
in Business. (n.d.). Fuzzy Logic in Financial Analysis Studies in
Fuzziness and Soft Computing, 359-381. doi:10.1007/3-540-32368-6_20
