Question

Mr. Pierpont has wealth of $200,000. He wants to keep at least $80,000 in bonds at all times, and will shift $10,000 into bonds from his checking account for each percentage point that the interest rate on bonds exceeds the interest rate on his checking account. If the interest rate on checking accounts is 4% and the interest rate on bonds is 9%, how much does Mr. Pierpont keep in his checking account?

Answer 1

Mr Pierpont should keep 70,000 in his checking account

Step-by-step explanation:

Given that:

The total wealth is = $200,000

He wants to keep at least $80,000 in bonds, so he can keep a maximum of $120,000 in checking accounts.

The the interest rate on checking accounts is 4% and the interest rate on bonds is 9%. a difference of 5.1 is known between this two interest rate

The interest rate in checking accounts is lower than interest rate of bond

4% is lesser than 9% in vice versa it is higher by 5%

A 5% difference will shift the 50,000 into bonds, because the need to shift 10,000 for every 1% that is taking from the checking account and then put in the bond.

Therefore, 120,000-50,000 = 70,000