Question

- In anticipation of the immense college expenses, Joe and Jill started an annual investmen program on their child's eighth birthday that will last until the eighteenth birthday. They plan to invest the following amounts at the beginning of each year: Year Amount ($) 1 2000 2 2000 3 2500 4 2500 5 3000 6 3500 7 3500 8 4000 9 4000 10 5000 To avoid unpleasant surprises, they want to invest the money safely in the following options: insured savings with 7.5% annual yield, 6-year government bonds that yield 7.9% and have a current market price equal to 98% of face value, and 9-year municipal bonds yielding 8.5% and having a current market price of 1.02 of face value. How should the money be invested?

Answer 1

Bond is a debt instrument issued for the purpose of raising finance for the company. It is a fixed income security where fixed interest is paid every year to the investor.

The way through which Joe and Jill should invest their money are as mentioned below:

• According to the given case, Joe and Jill should invested their money in municipal bonds for the first two years because municipal bonds have lock in period of nine years. After investing in municipal bonds, Joe and Jill is able to earn higher profit because the rate of return on municipal bonds is also higher that is 8.5%.
• After the 2 years, that is for third, fourth- and fifth-year Joe and Jill should invest in the government bonds because these bonds have a lock in period of 6 years. In investing in government bonds, Joe and Jill is able to get higher rate of return because the rate of interest on government bonds is also higher that is 7.9%.
• At last, Joe and Jill should invest their remaining money in insured savings to get the maximum return on their invested money.

Therefore, this is the only way for Joe and Jill to invest their money in bonds to get the maximum return on their invested money.