Returns and Bond Ratings FIN 534.
Kaya Rosado
August 1, 2021
FIN534 Financial Management
Dr. Black
Assignment 2
Returns and Bond Ratings
1. The present value of an amount of money is worth more in the future if it is invested
and earns interest and has potential cash flows (1). In this current example, PV=FV/
(1+i)n is the formula used to calculate the present value of the $11,000,000 Strayer
Jackpot. If the payout will be in 26 installments with an annual interest rate of 9%
and monthly compounding interest, the present value of the payments to be received
will be $1,063,894.20.
2. Bond ratings are ratings that allow investors to understand how likely a bond is to
default or fail to make its interest and principal payments on time (2). There are three
major types of bond rating agencies (Standard & Poor’s [S&P], Moody’s, and Fitch).
AAA ratings are considered premium grade ratings by Standard and Poor’s rating
scale. BBB are considered to be of a lower medium grade, CCC indicates that it is
extremely speculative, and D indicates that the company is in default. There are
currently only two companies with an AAA rating and that’s Microsoft and Johnson
& Johnson. Companies with this rating tend to have its bonds return for lower interest
rates and are the least likely to default. A company with a BBB rating would be Ford
Motor Company. Companies with this rating tend to represent a relatively low-risk
bond or investment and banks are allowed to invest in these bonds. CCC rated
Kaya Rosado
August 1, 2021
FIN534 Financial Management
Dr. Black
Assignment 2
Returns and Bond Ratings
1. The present value of an amount of money is worth more in the future if it is invested
and earns interest and has potential cash flows (1). In this current example, PV=FV/
(1+i)n is the formula used to calculate the present value of the $11,000,000 Strayer
Jackpot. If the payout will be in 26 installments with an annual interest rate of 9%
and monthly compounding interest, the present value of the payments to be received
will be $1,063,894.20.
2. Bond ratings are ratings that allow investors to understand how likely a bond is to
default or fail to make its interest and principal payments on time (2). There are three
major types of bond rating agencies (Standard & Poor’s [S&P], Moody’s, and Fitch).
AAA ratings are considered premium grade ratings by Standard and Poor’s rating
scale. BBB are considered to be of a lower medium grade, CCC indicates that it is
extremely speculative, and D indicates that the company is in default. There are
currently only two companies with an AAA rating and that’s Microsoft and Johnson
& Johnson. Companies with this rating tend to have its bonds return for lower interest
rates and are the least likely to default. A company with a BBB rating would be Ford
Motor Company. Companies with this rating tend to represent a relatively low-risk
bond or investment and banks are allowed to invest in these bonds. CCC rated
