University Finance Assignment: Present Value, Credit Ratings Analysis

This financial management assignment analyzes two key concepts: present value (PV) and credit ratings. The first part of the assignment calculates the present value of a lottery option, considering a monthly compounded discount rate of 9.38%. The analysis involves determining the present value of an equal annual amount and the compounding effect on a lump sum. The second part delves into credit ratings of bonds, explaining how they reflect the worthiness of a bond investment and differentiating between corporate and government bonds. It provides detailed explanations of credit ratings (AAA, BBB, CCC, and D), their implications for investment risk, and their assignment based on factors such as credibility, liquidity, and market risk. The assignment references relevant academic sources to support the analysis.

Running head: FINANCIAL MANAGEMENT
Financial Management
Name of the Student:
Name of the University:
Author’s Note:

1FINANCIAL MANAGEMENT
Table of Contents
Question 1........................................................................................................................................2
Question 2........................................................................................................................................2
References........................................................................................................................................4

2FINANCIAL MANAGEMENT
Question 1
The present value analysis of the available option was done with the help of the given
available option whereby the cash flows flowing from a lottery option would be analysed with
the help of the annual compounded monthly discount rate of 9.38%, which was computed as
follows:
Annual Interest Rate
Monthly Compounding Annual Rate 9%
Months in a Year 12
Monthly Interest Rate
0.75
%
Monthly Compounding Annual Rate
9.38
%
Annual Effective Interest Rate
N (In Years) 12
I (Interest Rate) 1%
PV -100
FV $109.38
EAR 9.3807%
Present Value
Discount Rate 9.3807%
N (In Years) 26
PMT 423077
Present Value
(PV)
($4,453,793.24
)
The present value of the equal annual amount was derived with the help of the equated
discount rate with the help of same the discounted cash flows were derived. On the other hand,
the compounding effect for the lump sum amount of $11 million would be compounded with the
help of 9.38%.

3FINANCIAL MANAGEMENT
Question 2
In the terms of investment, the credit rating of the bonds represents the worthiness of the
bond. Bonds can be both in the form of both corporate and government bonds for the company.
Credit Rating of the bond is different from an credit score when compared on an individual basis
(Sun & Zhang, 2017). Credit ratings like AAA, BBB, CCC and D represents the various credit
ratings that are assigned to a bond depending upon the ability for the repayment of principal and
interest amount. These ratings are assigned to an underlying bond with the help of various factors
representing the credibility, liquidity and market factor risk that are associated with an company
(Benmelech & Bergman, 2018).
AAA: The credit rating represents a prime grade rating description that is assigned to a bond
representing the potential ability of a bond in terms of repayment and the credit risk attached to
the same. The category is also represented in the Investment grade, which is a top class notch for
investment purpose. Both S&P Index and Fitch Index as an Investment Grade Bond assign the
proposed credit rating.
BBB: The credit rating assigned to the bond represent a Lower Medium grade of a bond that also
comes under the investment grade of investment. It is key to note that the BBB credit rating
represent slightly a higher risk than the AAA credit rating bond. Both S&P Index and Fitch
Index as an Investment Grade Bond assign the proposed credit rating (Zhao, Lin & Song, 2018).
CCC: The credit rating of the bond says that the assigned credit rating to the bond reflects the
substantial amount of credit and liquid risk that is associated with a bond. The bond is extremely
used for speculation purpose. The bond is also called as an Non-Investment Grade junk bonds.

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D: The credit rating of the assigned bond says that the credit rating is the lower most
classification or notch in terms of bond ratings. The credit ratings says that the bond can default
or is in default and represents extremely high risk associated with the bond (Kisgen, 2019).

5FINANCIAL MANAGEMENT
References
Benmelech, E., & Bergman, N. K. (2018). Credit Market Freezes. NBER Macroeconomics
Annual, 32(1), 493-526.
Kisgen, D. J. (2019). The impact of credit ratings on corporate behavior: Evidence from Moody's
adjustments. Journal of Corporate Finance.
Sun, L., & Zhang, J. H. (2017). Goodwill impairment loss and bond credit rating. International
Journal of Accounting & Information Management, 25(1), 2-20.
Zhao, Z., Lin, W., & Song, F. M. (2018). Rating-Based Restriction, Credit Rating Inflation and
Bond Covenants-Evidence from Chinese Bond Market. Credit Rating Inflation and Bond
Covenants-Evidence from Chinese Bond Market (September 26, 2018).