|Posted: November 3, 2006, 8:10 pm - IP Logged|
Here is how it works.
As the money comes in, they calculate how much the expected jackpot is going to be. They then save 1/26th of that in cash (i.e. one year's installment if the yearly payment option is used).
The remainder is then used to purchase various negotiable and very stable instruments, such as T-bills, such that as they mature, they will supply each year's installment of 1/26th of the jackpot's value, for 25 years.
When someone wins, they are given the first payment, and the rest is kept on hold until the winner decides what to do.
If he takes installments, great. If not, then the lottery sells the T-bills and other securities, and gives the winner the lump sum.
It is done this way because the interest on the T-bills during the time that there is no winner, plus the interest during the delay in selling them after a winning number is picked, is worth thousands of dollars. It also allows them to guarantee the size of the payments, as they have already purchased the securities in question, so they know just what the yield will be.