You saved $25,000.00 and want to diversify your monies.
• You invest 40% in a Treasury bond for 3 years at 4.25% APR compounded annually
• You place 35% in a CD at 3.15% APR for 3 years compounded annually
• 25% you invest in a stock plan that increases 8% the first year, decreases in value by 4% the second year, and increases by 6% the third year.
• You must show all of your work for each question in order to receive any credit.
1.) How much money will you start with in each account? Show your work below. (Hint: be sure your amounts add to $25,000.00)
Bond:
CD:
Stock:
2.) What will be the balance for each type of investment at the end of the third year? Be sure to show your work for each investment below.
Bond:
CD:
Stock:
3.) What is your total gain from all the investments combined? Show your work below.
4.) If you had invested 25% in treasury bonds and 40% in stock, would you have more or less of a gain after the three years? Show all of your work below.
1.) How much money will you start with in each account? Show your work below.
Total investment amount: $25,000
Bond: 40% of $25,000 = 0.4 * $25,000 = $10,000
CD: 35% of $25,000 = 0.35 * $25,000 = $8,750
Stock: 25% of $25,000 = 0.25 * $25,000 = $6,250
So you will start with:
Bond: $10,000
CD: $8,750
Stock: $6,250
2.) What will be the balance for each type of investment at the end of the third year? Be sure to show your work for each investment below.
Bond:
Principal = $10,000
Rate = 4.25%
Time = 3 years
Balance = $10,000 * (1 + 0.0425)^3 = $10,000 * 1.137619 = $11,376.19
CD:
Principal = $8,750
Rate = 3.15%
Time = 3 years
Balance = $8,750 * (1 + 0.0315)^3 = $8,750 * 1.099888 = $9,648.38
Stock:
First year: $6,250 * 1.08 = $6,750
Second year: $6,750 * 0.96 = $6,480
Third year: $6,480 * 1.06 = $6,880.80
So at the end of the third year:
Bond: $11,376.19
CD: $9,648.38
Stock: $6,880.80
3.) What is your total gain from all the investments combined? Show your work below.
Total gain = ($11,376.19 - $10,000) + ($9,648.38 - $8,750) + ($6,880.80 - $6,250) = $1,376.19 + $898.38 + $630.80 = $2,905.37
Total gain from all investments combined is $2,905.37
4.) If you had invested 25% in treasury bonds and 40% in stock, would you have more or less of a gain after the three years? Show all of your work below.
If you had invested 25% in treasury bonds and 40% in stock:
Bond: $6,250
Stock: $10,000
Gain from bond: $6,250 * (1 + 0.0425)^3 - $6,250 = $6,250 * 1.137619 - $6,250 = $2,126.19
Gain from stock: $10,000 * 1.08 * 0.96 * 1.06 - $10,000 = $11,424.00 - $10,000 = $1,424.00
Total gain = $2,126.19 + $1,424.00 = $3,550.19
Therefore, having invested 25% in treasury bonds and 40% in stock would result in a higher gain after the three years.