a. Assume that you just $25 million in the California lottery. You have the option of the state paying you 20 annual payments of $1.25 million at the end of each year, or taking all the money up front. If the rate of return on securities of similar risk to the lottery earning ( e.g., the rate on 20-year U.S. Treasury bonds) is 5%, what is the present value of your winnings? Option 1: A lump sum payment of $25 million up front Option 2: Twenty annual payments of $1.25 million HINT: This is an ordinary annuity. b. Considering this, which option should you take? Explain your answer

Q: Which is the better option if the interest rate is r=0.10 (r=10%)? Show all work used to arrive at…

A: Option 1: Receives $1000 at 10% today But if we invest the $1000 received today for 5 years

Q: Which One is the most Valuable Investment option? Assume Annual Compounding at an Interest rate of…

A: The idea of a time value of money (TVM) holds that a quantity of income is valuable greater now than…

Q: Given the following two sets of cash flows: Option A: $46,832.77 in 3 years plus $Y in 10 years…

A: We have to set the PV of two options equal and calculate the missing cash flow.

Q: You manage a pension fund that will provide retired workers with lifetime annuities. You determine…

A: Bonds are used to finance projects and operations by corporations, cities, states, and sovereign…

Q: (Related to Checkpoint 5.6) (Solving for ) You are considering investing in a security that will pay…

A: Future value = $2000Period = 28 yearsDiscount rate = 12%

Q: ou win the Console Lottery. They payoff is a growing “console” bond. That means that the bond will…

A: We can determine the PV of the console bond using the PV of perpetual growth formula as below: PV =…

Q: You are considering an investment that will pay you $20,000 in two years and $40,000 in four years.…

A: Present value (PV) is the current value of a future payment or a stream of future payments,…

Q: Given the following two sets of cash flows: Option A: $3,535.33 in 2 years plus $Y in 13 years time.…

A: Interest rate = 8.881% compounded biweekly First we have to calculate the effective annual interest…

Q: 3. You are to receive €400,000 in 90 days. a) Demonstrate how you would set up an options hedge. b)…

A: Options gives the opportunity to buy or sell currency at particulare exchange rate but there is no…

Q: Suppose someone offers to pay you $1,000 in one year. Which of the following is/are correct? Select…

A: According to time value of money, money received today is worth more than the same amount of money…

Q: Suppose that a risk-free investment will make three future payments of $100 in one year, $100 in two…

A: A financial concept known as present value (PV) determines the current value of future cash flows or…

Q: One year ago you bought a $10,000, 4-year Government of Canada Treasury Bill (discount bond) at the…

A: Solution:- The current market price of a bill means the price at which a bill is trading in the…

Q: Suppose the government decides to issue a new savings bond that is guaranteed to double in value if…

A: Present value of annuity is the current value of the future payments that are calculated using the…

Q: You are considering investing in a security that will pay you $2,000 in 30 years. a. If the…

A: Future Value = fv = $2000Time = t = 30 years

Q: 12. Hat Corp. has the option of receiving a $5,000 cash payment today or an $18,000 cash payment 7…

A: In the given question, the company has two options:   Option 1: Receive $ 5,000 today. Therefore,…

Q: You are considering an investment that will pay you $2,500 in one year, $5,000 in two years and…

A: Present Value refers to the discounted value of a single cash flow or multiple cash flows today…

Q: ) Suppose you see Citibank’s USD-denominated 5-year interest rate swap numbers quoted at 4.25% bid…

A: An interest rate swap is the agreement to swap one stream of interest payments for another over a…

Q: Suppose the U.S. Treasury offers to sell you a bond for $2,000. No payments will be made until the…

A: Bond is type of debt security which carries fixed return as interest. It can be redeem after the…

Q: 28. Consider a bank dealer who faces the following spot rates and interest rates. What should he set…

A: We are given the following:- Exchange rates on the spot:   - Bid: $1.42/€  - Ask: $1.45/€- Borrowing…

Q: If you could buy a bond now and five years later sell it for $40,000, what would you be willing to…

A: Bond's selling price after 5 years = $40,000Discount rate = 8%Number of years = 5 years

Q: 3. What is the present value of a $20,000 payment you would receive 5 years from now, assuming an…

A: The concept of time value of money will be used here. As per the concept of time value of money the…

Q: Which of the following investments that pay will $9,500 in 14 years will have a lower price today?…

A: The objective of the question is to determine which of the two investments, one earning an interest…

Q: Which of the following investments that pay will $18,500 in 8 years will have a higher price today?…

A: To determine the Investment which have a higher price today, have to calculate the Present Value…

Q: You manage a pension fund that will provide retired workers with lifetime annuities. You determine…

A: Perpetuities refers to the never-ending annuities or the annuities that will be received by an…

Treasury Market

On-the-run securities are the most recently issued securities in the market depth and are therefore traded at some premium. The off-the-run securities are the ones issued just before the most recent ones. The on-the-run securities have a lower yield to the investor than the off-the-run securities.