After Winning The Lottery Case Study
Chapter #3
Question 1 After winning the lottery, participants are often offered a choice between a flat amount immediately and a larger total sum paid out over time. Consider an example where a person has a choice between $100,000 per year for 20 years ($2,000,000 total) or an immediate payment of $1,200,000. Consider how interest rates impact the choice that should be made.
A. The equation to calculate the discounted present value of 20 annual payments is:
Present value = $100,000/(1 + i) + $100,000/(1 + i)2 + $100,000/(1 + i)3 + … + $100,000/(1 + i) If the interest rate is 3 percent, the present value is $1,487,747.49. This means that in this scenario, it is optimal to take the yearly installments. If the interest rate is 6 percent, the present value is $1,146,992.12. This means that in this scenario, it is optimal to take the payment of the flat $1,200,000
B. The range of interest rates between which the immediate payment should be made is from approximately 5.45 percent at the low end and infinity at the high end. This is true because any interest rate higher than 5.45 has a lower present value than the value of the immediate $1,200,000.
Question 4 Consider how the following scenarios might impact stock and bond prices.
The economy enters a recession. This scenario would likely cause stock and bond …show more content…
One notable event that occurred on this day is that the Federal Reserve stated that it would slowly raise interest rates and that rates would stay low for a considerable time, which may have had an impact on why stock prices changed so drastically during this day. This change was consistent with the classical theory of asset prices because the announcement by the Federal Reserve gave confidence that an asset would have a particular value, thus increasing its present
Question 1 After winning the lottery, participants are often offered a choice between a flat amount immediately and a larger total sum paid out over time. Consider an example where a person has a choice between $100,000 per year for 20 years ($2,000,000 total) or an immediate payment of $1,200,000. Consider how interest rates impact the choice that should be made.
A. The equation to calculate the discounted present value of 20 annual payments is:
Present value = $100,000/(1 + i) + $100,000/(1 + i)2 + $100,000/(1 + i)3 + … + $100,000/(1 + i) If the interest rate is 3 percent, the present value is $1,487,747.49. This means that in this scenario, it is optimal to take the yearly installments. If the interest rate is 6 percent, the present value is $1,146,992.12. This means that in this scenario, it is optimal to take the payment of the flat $1,200,000
B. The range of interest rates between which the immediate payment should be made is from approximately 5.45 percent at the low end and infinity at the high end. This is true because any interest rate higher than 5.45 has a lower present value than the value of the immediate $1,200,000.
Question 4 Consider how the following scenarios might impact stock and bond prices.
The economy enters a recession. This scenario would likely cause stock and bond …show more content…
One notable event that occurred on this day is that the Federal Reserve stated that it would slowly raise interest rates and that rates would stay low for a considerable time, which may have had an impact on why stock prices changed so drastically during this day. This change was consistent with the classical theory of asset prices because the announcement by the Federal Reserve gave confidence that an asset would have a particular value, thus increasing its present