Question 1. You have just won the Strayer Lottery jackpot of $11,000,000. You will be paid in 26 equal annual installments beginning immediately. If you had the money now, you could invest it in an account with a quoted annual interest rate of 9% with monthly compounding of interest. What is the present value of the payments you will receive?
| Strayer Lottery Jackpot | |||
| Jackpot |
$11,000,000 |
||
| Annual Installments |
26 |
||
| Interest Rate |
9% |
||
| PV | ? | ||
| Monthly compounded | |||
| Installments |
(26 X12)= 312 |
||
| Interest Rate |
(9÷12)= 0.75% |
||
|
Amount of each installment = ($11,000,000÷26) = $423, 077 |
|||
Delegate your assignment to our experts and they will do the rest.
The Interest rate is 9% compounded monthly, i.e. r= 9/12= 75%
Therefore, The present value that will be received = $1, 068, 896. 32
Question 2. In your own words and using various bond websites, please locate one of each of the following bond ratings: AAA, BBB, CCC, and D. Please describe the differences between the bond ratings. Identify the strengths and weaknesses of each rating
Credit ratings Refers to a quantitative assessment of the creditworthiness of a business in the event that they want to borrow money. Before investing in a company, borrowers must evaluate the ability of the company to respect a debt or financial obligation. Ideally, credit ratings are the financial indicators on which bases investors make a decision to invest in securities or not, securities such as bonds (Kagan, 2020). The agencies that do the credit ratings assign particular signs to the bonds for its worth like Moody’s, poor’s, standard, and Fitch.
Based on the quality of the bonds, they can either be AAA, BBB or CCC depending on the ratings. The first group, (AAA) is the highest ranked bonds based on their quality and performance. They are the top credit rating under the Moody section and they are characterized by minimum risks of any default in repayment. At maturity, AAA rated bonds are offered on the maturity data and have the least yields.
The second category of the ratings is the BBB rating bonds. They are commonly referred to as investment graded bonds. They are rated higher than the standard and poor’s. These bonds are judged by the agencies based on their ability to meet the obligations for repayment and the time limit (Kagan, 2020). Therefore, banks have the permission to invest in them.
The last category is the CCC rated bonds. Based on their ratings, they are known for being highly risky bonds for investment purpose. They are characterized by defaults in the repayment and are also known as junk bonds (Atting et al., 2013). Mostly, banks do not have the permission to invest in these bonds.
Comparison of the Credit ratings; differences, strengths and weaknesses
Differences
|
AAA They are the highest quality bonds. These bonds have the least default risk. They have the least possible yields. They are in the category of Moody’s |
BBB Are medium grade bonds. They can meet the repayment obligations Have medium yields to the investors Banks can invest in these bonds. |
|
CCC They are highly speculative bonds. Bank don’t have the permission to invest in these bonds. They are referred to as junk bonds. |
Strength and weakness
| Strengths | weakness |
|
AAA are the safest and offer highest quality. Low credit risk. |
Least yields |
|
BBB are moderately safe. Timely payment of debts Moderate credit risk |
Repayment of the debt may be affected by an adverse economic condition The liability of default is on the bond issuer |
| CCC Provide the highest returns |
High probability of default Least ratings Obligation for debt payments. |
References
Attig, N., El Ghoul, S., Guedhami, O., & Suh, J. (2013). Corporate social responsibility and credit ratings. Journal of business ethics , 117 (4), 679-694.
Kagan, J.(2020) Credit Rating Retrieved from https://www.investopedia.com/terms/c/creditrating.asp
