RETURNS AND BOND RATING 1

Returns and Bond rating

Student’s Name

Institutional Affiliations
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Answers to questions

To calculate the present value, Assuming that you will receive the payments in 26 equal annual

instalments, the present value of the payments would be $7,692,308.46. To calculate the present

value, we use the following formula:

PV = FV/(1+i)^n

where: PV is the present value of the payments

FV is the future value of the payments (that is, $11,000,000)

i is the interest rate you are investing at (in this case, 9%)

n is the number of times you are compounding your interest in a given year

(1/12 in this case, since you are compounding interest monthly).

To calculate the present value of your payments, we set the variables in this formula equal to

each other:

7,692,308.46 = 11000000/(1+0.09)^26

When solving P, we must remember to use logarithms to raise e. We can place the values in this

equation into the formula for future value (FV). After placing the variables into FV, it should

appear as follows:

7,692,308.46 = 11000000/(1+0.09)^26 or:

log(11000000/(1+0.09)^26) = log(7692308.46)
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When we take logs of both sides and solve for Ln(PV), it appears as follows:

log(7692308.46)/log(1+0.09) = log(11000000/FV)

After solving for Ln(PV) on both sides, we have the following equation:

log(7692308.46)/0.09 = log(11000000/FV)

Now that we have Ln(PV) on one side of the equation, we can use the change of base formula to

solve for PV.

log(7692308.46)/0.09 = log(11000000/FV) or:

ln(7692308.46)/0.09 = ln(11000000/FV)

Finally, we can perform the change of base formula on both sides to solve for PV.

PV = e^(log(7692308.46)/0.09)

After solving for PV, we have the following equation:

PV = 7692308.46

This means that the present value of your payments would be $7,692,308.46

There is a difference between the present value of the Strayer Lottery jackpot and the

future value of the 26 annual payments because some factors can influence these values, such as

changes in interest rates and compounding frequency. In this case, the present value is lower than

the future value because you receive the payments over a longer time (26 years), and interest is
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only being compounded monthly. If the interest were compounded more frequently, or if you

received the payments sooner, the present value would be higher than the future value.

There is a relationship between risk and return in the bond market, with higher-risk bonds

typically having higher returns. Investors are generally willing to take on more risk for greater

potential rewards. While lower-rated bonds tend to have the highest potential returns, they also

carry a greater degree of risk due to factors such as default or interest rate changes (Houweling et

al., 2017). In contrast, higher-rated bonds tend to have lower returns but are considered to be less

risky because these bonds are less likely to default and typically carry fixed interest rates that do

not change over time. Therefore, different bond ratings can provide information about risk and

return, with lower-rated bonds having the potential for greater returns but also carrying more

risk.

Many websites provide information about bond ratings, interest rates, and risk. Some of

these websites include:

-The Bond Market Association: https://www.bondmarkets.com/

-Bloomberg: https://www.bloomberg.com/

-The Balance: https://www.thebalance.com/what-are-bond-ratings-and-why-do-they-matter-

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These websites provide information about the different bond ratings, including AAA,

BBB, CCC, and D. They also provide information about the required interest rates and the risk

associated with each rating. In general, AAA-rated bonds are considered the safest, carrying the

lowest risk of default. These bonds typically have the lowest interest rates. CCC-rated bonds are
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considered high-risk, with a higher chance of default. BBB-rated bonds are considered somewhat

risky but are generally more reliable than CCC-rated bonds. Finally, D-rated bonds have the

highest risk of default and typically have the highest interest rates. Based on this information,

different bond ratings can indicate differences in risk and return, with higher-risk bonds typically

offering greater potential returns and carrying more risk. Some useful websites for locating

different bond ratings include Bond Rating Agency, Investopedia, and The Balance. As a result,

these bonds typically carry higher interest rates to compensate for this additional risk.

Additionally, many websites provide information about where to find these different bond

ratings, such as through online bond trading platforms or financial news websites. Using these

sources, we could locate several bonds with each of the different ratings and research their

differences.
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References

Houweling, P., & Van Zundert, J. (2017). Factor investing in the corporate bond

market. Financial Analysts Journal, 73(2), 100-115.