You own two investments, A and B, that have a combined total value of 87,660 dol

Question

You own two investments, A and B, that have a combined total value of 87,660 dollars. Investment A is expected to make its next payment in 1 month. A’s next payment is expected to be 294 dollars and subsequent payments are expected to grow by 0.75 percent per month forever. The expected return for investment A is 1.11 percent per month. Investment B is expected to pay 169 dollars each quarter forever and the next payment is expected in 3 months. What is the quarterly expected return for investment B? Answer as a rate in decimal format so that 12.34% would be entered as .1234 and 0.98% would be entered as .0098.

Explanation / Answer

Investment A

Growth rate = 0.75%

Rate = 1.11%

Value of investment A = 294/(1.11%-0.75%)= 81666.67

Value of investment B = 87660-81666.75 = 5993

Let the expected return is r% of invesemtn B

Then

5993 = 169/(r%)

r% = 2.82% or 0.0282

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