The National Credit Union has $250,000 available to invest in a 12-month commitm

Question

The National Credit Union has $250,000 available to invest in a 12-month commitment. The money can be placed in Treasury notes yielding an 8% return or in municipal bonds at an average rate of return of 9%. Credit union regulations require diversification to the extent that at least 50% of the investment be placed in Treasure notes. Because of defaults in such municipalities as Cleveland and New York, it is decided that no more than 40% of the investment be placed in bonds. How much should the National Credit Union invest in each security so as to maximize its return on investment?

Explanation / Answer

Since we want to maximize our return and the municipal bonds havethe highest return, we want to maximize our investment in municipalbonds. From the problem, we know that we cannot invest more than 40% ofour funds in municipal bonds. Thus, we will invest thismaximum of 40%. The remaining 60% we can invest intreasuries. This satisfies both requirements (T > 50%, M

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