Mark just retired, and has $700,000 to invest. A very safe Certificate of Deposit (CD) account pays 2%, while a riskier bond pays...

Question

Mark just retired, and has $700,000 to invest. A very safe Certificate of Deposit (CD) account pays 2%, while a riskier bond fund pays 8% in interest. Mark figures he needs $25,000 a year in interest to live on. How much should he invest in each account to make enough interest while minimizing his risk?

____ at 2%

____ at 8%

Answer 1

I'm assuming minimum risk means to put less money in the bond than the CD.

Let x = the CD amount and y = the bond amount.

x+y = 700000 --> y = 700000-x

0.02x + 0.08y = 25000

0.02x +0.08(700000-x) = 25000

0.02x + 56000 - 0.08x = 25000

0.06x = 31000

x = $516666.67 at 2%

y = $183333.33 at 8%

If the problem asked for at least $25000 a year in interest, then Mark could put all the money into the CD and get $56000 a year with little or no risk.