(1.5 points) Answer: 2. (1.5 points) An investor wants to invest in corporate bo

Question

(1.5 points) Answer: 2. (1.5 points) An investor wants to invest in corporate bonds that are rated AAA, A and B. The lower rated ones pay higher interest, but pose a higher risk as well. The average yield is 3% on AAA bonds, 4% on A bonds, and 8% on B bonds. Being conservative, the investor wants to have three times as much in AAA bonds as in B bonds. How much should she invest in each type of bond with a total investment of $275.000 and an annual return of $8600 on the three investments? (a) List and verbally define your variables. (b) Set-up the appropriate system of equations. Do NOT solve! Page 1 of4

Explanation / Answer

(A)

Variables:

The investment in AAA bond = X

The investment in A bond = Y

The investment in B bond = Z

(B)

She invest in each type of bond with a total investment of $275000, The investor wants to have three times as much in AAA bonds as in B bonds.

X=3*( 275000-Y-Z)

i.e., X+3Y+3Z = 825000 ________________(1)

The average yield is 3% on AAA bonds, 4% on A bonds, and 8% on B bonds. The investor wants to have three times as much in AAA bonds as in B bonds.

i.e., 0.03X+0.04Y+0.08Z=8600 ________________(2)

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