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Determine the present value of the lottery

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1. You have just won $10 million in the state lottery, which promises to pay you $1 million (tax free) every year for the next 10 years. Have you really won $10 million? Why? If the average expected interest rate is 5%, what's the present value of the lottery? (Assume they pay $1 million right now, and pay you $1 million each year in the following 9 years).

2. Assume you want to invest some money in the bond market for one year. If you expect that the interest rates will decline, what kind of bond that you would rather to invest, long-term bonds or short term bonds? Support your conclusion with numerical evidence. (Assume that all the 1-year, 2-years, 5-years, 10-years, and 20-years bonds have 10% coupon, annual coupon payment, for all of them current market price is 1000, and the interest rate will drop from 10% to 5%). Which type of bond has greater interest-rate risk?

Reference no: EM132817964

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