Question

Kamran wins the big game lottery. He invests part of his winnings in treasury bonds promising a 5% annual return and he deposits the rest in a money market account which promises a 3.75% annual yield. He invests $5000 more in treasury bonds than he deposits in the money market account. If the annual return on his investments is $661.25 how much did Kamran win?

Answer 1

Amount won by Kamran = $21,450

Explanation:

This can be calculated using the following 3 steps:

Step 1: Calculation of the amount invested in treasury bonds

Since the limit to the duration of investment is not stated, the amount invested can be calculated using the formula for calculating the present value of a perpetuity as follows:

PV = P / r …………………………………. (1)

Where;

PV = Present value or the amount invested treasury bonds = ?

P = Annual return on his investments = $661.25

r = Annual rate of return = 5%, or 0.05

Substitute the values into equation (1), we have:

PV = $661.25 / 0.05 = $13,225

Step 2: Calculation of the amount deposited in the money market account

From Step 1 above, we have:

Amount invested treasury bonds = $13,225

Since he invests $5000 more in treasury bonds than he deposits in the money market account, the amount deposited in the money market account can be calculated as follows:

Amount deposited in the money market account = Amount invested treasury bonds - $5,000 = $13,225 - $5,000 = $8,225

Step 3: Calculation of the amount won by Kamran

Amount won by Kamran = Amount invested treasury bonds + Amount deposited in the money market account = $13,225 + $8,225 = $21,450