Question

You have ​$750,000 in an IRA​ (Individual Retirement​ Account) at the time you retire. You have...

You have

​$750,000

in an IRA​ (Individual Retirement​ Account) at the time you retire. You have the option of investing this money in two​ funds: Fund A pays

1.71.7​%

annually and Fund B pays

6.76.7​%

annually.

How should you divide your money between Fund A and Fund B to produce an annual interest income of

​$42,250​?

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Homework Answers

Answer #1

Total Investment available = $750,000

Let Investment in Fund A = IA = x

Investment in Fund B = IB = $750,000 - x

Interest for Fund A = rA = 1.7%

Interest for Fund B = rB = 6.7%

Annual Interest Income = $42,250

Annual Interest income for the funds should equal to $42,250

Annual Interest Income = [IA * rA] + [IB * rB]

$42,250 = [x * 1.7%] + [ ($750,000 - x) * 6.7%]

$42,250 = 0.017 x + $50,250 - 0.067 x

0.05 x = $8,000

x = $160,000

Investment in Fund A = $160,000

Investment in Fund B = $750,000 - x = $750,000 - $160,000 = $590,000

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