Week 7 Assignment

Sherri Coleman

FIN 534: Financial Management

Strayer University

Dr. Black

July 27, 2022

Returns and Bonding Ratings

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.

Calculate the present value of the payments you will receive. Show your calculations using formulas in your paper or in an attached spreadsheet file.

Basic Information

Jackpot = $11,000,000

Annual Installments = 26

Interest Rate = 9%

PV?

Where:

PV=Present Value

FV=Future Value

r=Nominal Interest rate

n=Number of periods

k= Yearly compounding times

Therefore:

Monthly Compounded

Installments (k) = 12

Nominal interest rate (r) = 9%

Number of periods (n) = 26

Future Value (FV) = 11000000

Thus:

PV = 1068896.32.

Explain why there is a difference between the present value of the Strayer lottery jackpot and the future value of the 26 annual payments based on your calculations and the information provided.

The present value is greater than the winner of the jackpot would receive if annual installments were chosen as an option. In this regard, monthly compounding of interest means that each month, the interest rate is added to the initial investment. The present value allows comparing the current value of the money with the sum that the individual will receive upon investment. The difference is attributed to the time value of money.

Compare the information about risk and return indicated by different bond ratings. Support your answer with references to research. Use various bond websites to locate one of each of the following bond ratings: AAA, BBB, CCC, and D. Research the differences between the bond ratings, the required interest rates, and the risk. List the websites used as sources for this research.

Credit ratings play a fundamental role in helping investors make informed decisions towards investing in securities and or/bonds (Shi et al., 2019). The ratings include AAA, BBB, CCC, and D. Bonds that are rating AAA have the highest degree of worth and quality, which implies that they are capable of easily meeting its financial requirement and have the least risk of default.

BBB rating bonds are also referred to as investment graded bonds, and are capable of meeting of the obligations for its payments, thus giving banks the liberty to invest in (Shi et al., 2019). CCC bonds rating are highly risky to invest in (Hajek, Olej & Prochazka, 2016). Therefore, banks do not have an appetite to invest in the CCC bonds. On the other hand, D rating bonds have a very small value or no value. This element makes the bonds susceptible to default.

Identify the strengths and weaknesses of each rating.

Bond	Strengths	Weaknesses
AAA	High credit quality High safety level Lowest credit risk	Potential for false credit rating Challenge of liquidation
BBB	Moderate safety Timely payment of debt Moderate credit risk	Bond issuer liable in case of default
CCC	High rate of return	High default probability
D	Lowest value/short term default	Lowest ratings High likelihood of default

References

Hajek, P., Olej, V., & Prochazka, O. (2016, December). Predicting Corporate Credit Ratings Using Content Analysis of Annual Reports–A Naïve Bayesian Network Approach. In FinanceCom 2016 (pp. 47-61). Springer, Cham. https://doi.org/10.1007/978-3-319-52764-2_4

Shi, B., Zhao, X., Wu, B., & Dong, Y. (2019). Credit rating and microfinance lending decisions based on loss given default (LGD). Finance Research Letters, 30, 124-129. https://doi.org/10.1016/j.frl.2019.03.033