Your Questions About How To Invest In Bonds

Chris asks…

A 114,000 trust is to be invested in bonds paying 8%, CDs paying 5%, and mortgages paying 10%. The bond and?

A 114,000 trust is to be invested in bonds paying 8%, CDs paying 5%, and mortgages paying 10%. The bond and CD investments together must equal the mortgages investment. To earn a $9090 annual income from the investments, how much should the bank invest in bonds?

John answers:

Hi Krista

17,450 should be invested in bonds at 8%
39,550 should be invested in CD’s at 5% and
57,000 should be invested in mortgages at 10%

Shy

Joseph asks…

What do i need to know if I am investing in bonds? How do you interpret the bond market information?

John answers:

Yahoo has some great, easy to understand information on bonds. Go to:
http://finance.yahoo.com/education/bond

Stocker gave some great advice!

Carol asks…

Linear Programming Word Problem?

A retirement fund manager has 2,000,000 to invest in a combination of stocks, bond and money market. The company requires no more than 1,000,000 can be invested in stocks and bonds combined. They also require that no more than 1,200,000 can be invested in the combination of bonds and money market funds. Stocks yield an annual return of 10% of the amound invested, bonds yield a return of 8%, and money market funds yield a return of 6%. How much should be invested in each order to maximize the return?

John answers:

Unlike a real world situation this story problem tells you what will happen in the future. Higher anticipated returns in the real world usually come with higher potential losses. There is no mention of any potential for loss. Please realize that because of this simplification my answer to this problem should not guide you in real world investments.

I notice that no unit of currency is specified in the problem so I will refrain from identifying a unit of currency in my answer.

The stocks provide the greatest return on investment.
The maximum amount of money that you are allowed to invest in stock is a million units of money.
If you invest a million units of money in stock then the return on that investment will be 100,000 units of money.
If you invest a million units of money in stock then you are not allowed to invest any money in bonds.
That means If you invest a million units of money in stock that you would invest the remaining million units of money in money market funds and earn 60,000 units of money.
That means that if you invest a million units of money in stocks that your total return on all investments would be 160,000.
If instead you were to invest one unit of money in bonds then you would be required to invest one less dollar in stocks. The result would be that you would receive 0.1 unit of money less for the stock and 0.08 more for the investment in Bonds. The net result is that you would earn 0.02 units of money less.
Transitioning any larger amount of money to Bonds would further reduce the total returns on investment.
The way to maximize the return on investment is therefore to invest a million units of money in stocks and a million units of money in money market.

Richard asks…

Stocks, bonds investing?

Is there such thing as a company which invests your money in stocks, bonds etc and then takes a small cut of profits?

They have the knowledge of how the market drops and rises etc, and the customers simply hand the money to them to invest (Not risk free of course)

John answers:

That would be a private fund, known colloquially as a hedge fund. Typically they charge a 1% management fee and a 20% share of the profits over a 6% hurdle. They don’t advertise and they either keep the number of investors to 100 or less or they restrict their investors to “qualified purchasers” such as people with over $5 million in investment assets. If they don’t keep to these restrictions then they will have to register as a mutual fund in which case they would have more reporting requirements and not be allowed to share in the profit hence they would have to depend on the fee for income.

Betty asks…

$ Should be invested in Stocks? and how much in Bonds?

Suppose that you received an unexpected inheritace of $27,900. You have decided to invest the money by placing some of the money in stocks and some in bonds. To diversify, you decided that four times the amount in bonds should equal five times the amount invested in stocks. How much should be invested in stocks? How much should be invested in bonds?

John answers:

S= stocks
b=bonds

s+b=27900

4b=5s

b=27900-s

4(27900-s)=5s
111600-4s=5s
111600=9s
s=12400

12400+b=27900
b=15500

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