Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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The employee credit union at State University is planning the allocation of funds for the coming year. The credit union makes four types of loans to its members. In addition, the credit union invests in riskfree securities to stabilize income. The various revenueproducing investments together with annual
Type of Loan/Investment Annual Rate of Return (%)
Automobile loans 8
Furniture loans 10
Other secured loans 11
Signature loans 12
Riskfree securities 9
The credit union will have $2,000,000 available for investment during the coming year. State laws and credit union policies impose the following restrictions on the composition of the loans and investments.•Riskfree securities may not exceed 30% of the total funds available for investment.•Signature loans may not exceed 10% of the funds invested in all loans (automobile, furniture, other secured, and signature loans).•Furniture loans plus other secured loans may not exceed the automobile loans.•Other secured loans plus signature loans may not exceed the funds invested in riskfree securities.How should the $2,000,000 be allocated to each of the loan/investment alternatives to maximize total annual return? What is the projected total annual return?
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Step 1 Introduction
Annual rate of return :
Divide the amount gained or lost at the end of the year by the initial investment made at the beginning of the year to get the yearly rate of return.
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