An investor wishes to invest all of her $6.5 million in a diversified portfolio through acommercial lender. The types of investments, the expected annual interest rate for theinvestment, and the maximum allowed percentage of the total portfolio that the investmentcan represent are shown in the table below:INVESTMENT EXPECTED INTEREST MAXIMUM ALLOWED(% of total portfolio)Low-income mortgage loans 7.40% 20%Conventional mortgage loans 6.20% 25%Government sponsoredmortgage loans 8.00% 25%Bond investments 4.45% 30%Stock investments 7.50% 15%Futures trading 8.90% 10%She wants at least 40% of her total investment in non-mortgage instruments. Furthermore, shewants no more than 35% of her total investment to be in high-yield and high-risk instruments(i.e. expected interest rate of investment is 8% or greater). Formulate and solve this problem inExcel to determine how her money should be diversified in a manner which will meet therequirements and maximize the amount of interest income. (Hint: Make sure that the LHS andRHS of constraints are in terms of dollars not ratios)a) Formulate the problem.b) What is the expected total interest income generated from the investment strategy(the value of the objective function)?c) Based on your solution, how much should be invested in each investment option? Speak

An investor is considering the purchase of either an IO or PO strip from a CMO offering. The portion of the mortgage pool backing this tranche consists of $1,000,000 in mortgages with a remaining maturity of 10 years and an 8 percent interest rate.a. Assuming annual payments and a zero prepayment rate, prepare a schedule showing the IO and PO cash flows that would be payable to investors in this tranche. If the interest rate demanded by investors on this investment is also 8 percent, what would be the prices of the IO and PO strips?b. If interest rates increased to 10 percent and prepayments remained at a zero rate, how would the price of the IO and PO strips change? Which security, the IO or PO, exhibits the greatest price change from (a)? Why?c. Investor interest rates now decline to 6 percent. What is the price of the IO? PO? Prepayments now increase to a rate of 20 percent per year because mortgage borrowers in the pool begin to refinance at lower interest rates. What would prices…

Kirstin Brown is a portfolio manager at Standard life plc. She wants to estimate the interest rate riskof assets of the company consisting of 1 million shares of Bond A, 2 million shares of Bond B, and 2million shares of Bond C. The duration of Bond A is 5.59, a valuation model found that if interest ratesdecline by 30 basis points, the value of Bond A will increase to 83.5 pounds, and if interest ratesincrease by 30 basis points, the value of Bond to A will decline to 80.75 pounds. The same valuationmodel also found that if interest rates decreases by 50 basis points, the value of Bond B increases to104.6 pounds, and if interest rates increases by 50 basis points, the value of Bond B decreases to 96.4pounds, and the current value of Bond B is 100 pounds. Kirstin also knows from the valuation modelthat, by using the duration and convexity rule, if interest rates decline by 1%, the price of bond Cincreases approximately by 8.46 pounds, and if interest rates increase by 3%, the price of…

A bank is attempting to determine where its assets should be invested during the current year. At present, $500,000 is available for investment in bonds, home loans, auto loans, and personal loans. The annual rates of return on each type of investment are known to be the following: bonds, 10%; home loans, 16%; auto loans, 13%; and personal loans, 20%. To ensure that the bank’s portfolio is not too risky, the bank’s investment manager has placed the following three restrictions on the bank’s portfolio:■ The amount invested in personal loans cannot exceed the amount invested in bonds.■ The amount invested in home loans cannot exceedthe amount invested in auto loans.■ No more than 25% of the total amount invested can be in personal loans. Help the bank maximize the annual return on its investment portfolio.

The management of Que-B Bhd is targeting to accumulate funds to finance its projects. The strategy is to keep several portfolios with the specific intention to obtain the gains if the value of the investment appreciates in the future. Security portfolios I and II are held at the end of Que-B Bhd’s first year of operations and are shown in the following table: Year-End Security Cost Market Value I RM36,000 RM39,000 II RM17,000 RM20,000 a) Provide the necessary journal entries to record the adjustments of the securities portfolios to market value.

A financial manager is considering two possible sources of funds necessary to finance a $10,000,000 investment that will yield $1,500,000 before interest and taxes. Alternative one is a short-term commercial bank loan with an interest rate of 8 percent for one year. The alternative is a five-year term loan with an interest rate of 10 percent. The firm's income tax rate is 30 percent.   What are the crucial considerations when selecting between short- and long-term sources of finance?

. A bank is attempting to determine where its assets should be invested during the currentyear. At present, $500,000 is available for investment in bonds, home loans, auto loans,and personal loans. The annual rate of return on each type of investment is known to be:bonds, 10%; home loans, 16%; auto loans, 13%; personal loans, 20%. To ensure that thebank’s portfolio is not too risky, the bank’s investment manager has placed the followingthree restrictions on the bank’s portfolio:a. The amount invested in personal loans cannot exceed the amount invested inbonds.b. The amount invested in home loans cannot exceed the amount invested in autoloans.c. No more than 25% of the total amount invested may be in personal loans.The bank’s objective is to maximize the annual return on its investment portfolio.Formulate an LP that will enable the bank to meet this goal.

Blair Rosen. Inc. (BR) is a brokerage firm that specializes in investment portfolios designed to meet the specific risk tolerances of its clients. A client who contacted BR this past week has a maximum of 50,000 to invest. BRs investment advisor decides to recommend a portfolio consisting of two investment funds: an Internet fund and a Blue Chip fund. The Internet fund has a projected annual return of 12%, and the Blue Chip fund has a projected annual return of 9%. The investment advisor requires that at most 35,000 of the clients funds should be invested in the Internet fund. BR services include a risk rating for each investment alternative. The Internet fund, which is the more risky of the two investment alternatives, has a risk rating of 6 per 1,000 invested. The Blue Chip fund has a risk rating of 4 per 1,000 invested. For example, if 10,000 is invested in each of the two investment funds, BRs risk rating for the portfolio would be 6(10) + 4(10) = 100. Finally. BR developed a questionnaire to measure each clients risk tolerance. Based on the responses, each client is classified as a conservative, moderate, or aggressive investor. Suppose that the questionnaire results classified the current client as a moderate investor. BR recommends that a client who is a moderate investor limit his or her portfolio to a maximum risk rating of 240. a. Formulate a linear programming model to find the best investment strategy for this client. b. Build a spreadsheet model and solve the problem using Solver. What is the recommended investment portfolio for this client? What is the annual return for the portfolio? c. Suppose that a second client with 50,000 to invest has been classified as an aggressive investor. BR recommends that the maximum portfolio risk rating for an aggressive investor is 320. What is the recommended investment portfolio for this aggressive investor? d. Suppose that a third client with 50,000 to invest has been classified as a conservative investor. BR recommends that the maximum portfolio risk rating for a conservative investor is 160. Develop the recommended investment portfolio for the conservative investor.

Fenton, Inc., has established a new strategic plan that calls for new capital investment. The company has a 9.8% required rate of return and an 8.3% cost of capital. Fenton currently has a return of 10% on its other investments. The proposed new investments have equal annual cash inflows expected. Management used a screening procedure of calculating a payback period for potential investments and annual cash flows, and the IRR for the 7 possible investments are displayed in image. Each investment has a 6-year expected useful life and no salvage value. A. Identify which project(s) is/are unacceptable and briefly state the conceptual justification as to why each of your choices is unacceptable. B. Assume Fenton has $330,000 available to spend. Which remaining projects should Fenton invest in and in what order? C. If Fenton was not limited to a spending amount, should they invest in all of the projects given the company is evaluated using return on investment?

The Jeffersons want to start investing $600 monthly to achieve their stated short- and long-term objectives. Which of the following monthly investments is most appropriate for them at this time and why? Provide two pros for the investment allocation you selected and one con for each of the investment allocations you did not select.   $600 in a Roth IRA account for Jaylen, allocated as $300 in large cap domestic growth stocks, and $300 in an international growth fund $600 in a AAA-rated municipal bond fund $600 in a high yield, long-term bond fund $100 in a money market account, and $500 in a Roth IRA global balanced mutual fund