Lotta Dough Just Won the State Lottery and Has Elected

question 45

Multiple Choice

Lotta Dough just won the state lottery and has elected to receive $50,000 per year for 20 years in the form of an annuity due. What is the present value of this stream of payments if money can earn 8 percent annual interest?

• A) $579,139
• B) $500,000
• C) $530,180
• D) $479,035

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Definitions:

Floating-rate Bonds

Bonds that have a variable interest rate, which adjusts periodically according to a benchmark interest rate or index.

Coupon Rate

The interest rate stated on a bond or other fixed-income security, representing the annual interest paid by the issuer to the bondholder.

Convertible Bond

This is a bond that provides the holder the ability to convert it into a set number of shares of the issuer's stock at agreed-upon times over the bond's term, often by the choice of the investor.

Common Stock

A type of equity security that represents ownership in a corporation, giving holders voting rights and a share in the company's profits through dividends.