#2. National Credit Union has $250,000 available to invest in a 12-month commitm
ID: 437996 • Letter: #
Question
#2. National Credit Union has $250,000 available to invest in a 12-month commitment. The money can be placed in treasury notes (with a return of 8% and a risk score of 2) or in municipal bonds (with a return of 9% and a risk score of 3). Credit union regulations require diversification to the extent that between 50% and 70% of the total investment must be placed in treasury notes. Also, due to past defaults in such municipalities as Cleveland and New York, it is decided that the average risk score of the total investment should be no more than 2.42.How much should National Credit Union invest in each security so as to maximize its return on investment?
Explanation / Answer
Organize your data; a.) $ 250 000 for one year b.) at least 50 % of $ 250 000 in treasury notes c.) treasury notes at 8 % pa d.) municipal bonds at 9 % pa e.) descision; a maximum of 40 % invested in municipal bonds Now (e) means 60 % is NOT placed in municipal bonds, making it 60 % put in treasury notes and thus meeting the requirement (b). As a formula, then; return on investment = ( $ 250 000 x 60 % x 8 % + $ 250 000 x 40 % x 9 % ) : $ 250 000 return on investment = ( $ 12 000 + $ 9 000 ) : $ 250 000 roi = 21 000 / 250 000 x100% = 8.4 %
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