Question

Betsy, a recent retiree, requires $5,000 per year in extra income. She has $70,000 to invest and can invest in B-rated bonds paying 13% per year or in a certificate of deposit (CD) paying 5% per year. How much money should be invested in each to realize exactly $5,000 in interest per year?

A. The amount of money invested at 13% = ___
B. The amount of money invested at 5% = ___

Answer 1

A. The amount of money that Betsy should invest n B-rated bonds at 13% is $20,000.

B. The amount of money that Betsy should invest in a certificate of deposit (CD) at 5% is $50,000.

How are CDs different from Bonds?

Certificates of deposit (CDs) are short-term investments in financial institutions (money market) while Bonds are long-term investments in the stock exchange (capital market).

CDs pay reduced interest rates when compared to bonds'.

Data and Calculations:

The amount required per year in interest = $5,000

Total investible funds = $70,000

Interest rate of B-rated bonds = 13%

Interest rate in CD = 5%

Since Betsy is not interested in realizing more than $5,000 in interest per year, she should invest $50,000 in the CD and $20,000 in the B-rated bonds.

The interest in CD = $2,500 ($50,000 x 5%)

The interest in bonds = $2,600 ($20,000 x 13%)

Total interest in CD and bonds = $5,100 ($2,500 + $2,600)

Thus, Betsy should invest $50,000 in the CD and $20,000 in the B-rated bonds.

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