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The National Credit Union has $250,000 available to invest in a 12-month commitment
The National Credit Union has $250,000 available to invest in a 12-month commitment. The money can be placed in Treasury notes yielding an 8% return or in municipal bonds at an average rate of return of 9%. Credit union regulations require diversification to the extent that at least 50% of the investment be placed in Treasury notes. Because of defaults in such municipalities as Cleveland and New York, it is decided that no more than 40% of the investment be placed in bonds. How much should the National Credit Union invest in each security so as to maximize its return on investment? Show all work to earn full credit.
Expert Solution
Maximum investment= 40%
Treasuries investment (remaining)= (100%- 40%)
= 60%
Municipal bonds= 40% * 250,000
= 100000
Treasury bonds= 60% * 250,000
= 150000
Return on Municipal bonds= 9% * 100,000
= 9000
Return on treasuries= 8% * 150,000
= 12000
Total investment= 9,000 + $12,000
= 21000
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