Chapter 8. Finance Applications. Refer to the PI Mortgages Example in the book about a firm that provides mortgages to finance various investments. Now imagine that just like Pl Mortgages, a small start up investment company called SmartInc has $1.5 million to invest. There are five categories of loans, each with an associated return and risk ranging from 1 to 10, with 1 being the best, and the risk ratings are similar to what we saw in the PI Mortgage Example. However, the Rates of Return are different in this new market. Just like PIM, if they have any uninvested money left over, the money is placed in a savings account with no risk and a 1.5% rate of return. The information available is placed in the table here: Loan/Investment First Mortgages Second Mortgages Personal Loans Govt. Securities Return Risk Savings 4% 8% Commercial Loans 6% 8% 2% 1.5% 4 1 0 The goal for the mortgage team at SmartInc is to allocate the money to the categories based upon the constraints placed by the Board regarding how to spend the $1.5 million: • Maximize the average return per dollar • The average risk of the portfolio should not be more than 5 (not including the savings account) • At the most 20% of the investment (not counting savings account) should be made in commercial loans (NOTICE: this a big change from the textbook example) • The amount invested in second mortgages and personal loans combined should not be higher than the amount invested in first mortgages. • At least 5% of the total budget has to be invested in Government Securities.
Chapter 8. Finance Applications. Refer to the PI Mortgages Example in the book about a firm that provides mortgages to finance various investments. Now imagine that just like Pl Mortgages, a small start up investment company called SmartInc has $1.5 million to invest. There are five categories of loans, each with an associated return and risk ranging from 1 to 10, with 1 being the best, and the risk ratings are similar to what we saw in the PI Mortgage Example. However, the Rates of Return are different in this new market. Just like PIM, if they have any uninvested money left over, the money is placed in a savings account with no risk and a 1.5% rate of return. The information available is placed in the table here: Loan/Investment First Mortgages Second Mortgages Personal Loans Govt. Securities Return Risk Savings 4% 8% Commercial Loans 6% 8% 2% 1.5% 4 1 0 The goal for the mortgage team at SmartInc is to allocate the money to the categories based upon the constraints placed by the Board regarding how to spend the $1.5 million: • Maximize the average return per dollar • The average risk of the portfolio should not be more than 5 (not including the savings account) • At the most 20% of the investment (not counting savings account) should be made in commercial loans (NOTICE: this a big change from the textbook example) • The amount invested in second mortgages and personal loans combined should not be higher than the amount invested in first mortgages. • At least 5% of the total budget has to be invested in Government Securities.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Transcribed Image Text:Based on this information, give the following answers after creating a LP and analyzing it
using the Solver in Excel:
1. The Maximum value of Returns for SmartInc based on your recommendations within the
given constraints would be = $
and the Net Rate of return is
%.
2. Fill in the following table to indicate the amount of money to be invested in each type of
investment (you
use whole numbers,
decimals or $ signs required).
Investment Amount ($)
First
Mortgages
Second
Mortgages
Personal
Loans
Commercial
Loans
Govt.
Securities
Savings
Transcribed Image Text:Chapter 8. Finance Applications. Refer to the PI Mortgages Example in the book about a firm
that provides mortgages to finance various investments. Now imagine that just like PI
Mortgages, a small start up investment company called SmartInc has $1.5 million to invest.
There are five categories of loans, each with an associated return and risk ranging from 1 to
10, with 1 being the best, and the risk ratings are similar to what we saw in the PI Mortgage
Example. However, the Rates of Return are different in this new market. Just like PIM, if they
have any uninvested money left over, the money is placed in a savings account with no risk
and a 1.5% rate of return. The information available is placed in the table here:
Loan/Investment
Return
Risk
First Mortgages
4%
4
Second Mortgages
8%
6
Personal Loans
8%
Commercial Loans
6%
3
Govt. Securities
2%
1
Savings
1.5%
The goal for the mortgage team at Smartlnc is to allocate the money to the categories based
upon the constraints placed by the Board regarding how to spend the $1.5 million:
• Maximize the average return per dollar
• The average risk of the portfolio should not be more than 5 (not including the savings
account)
• At the most 20% of the investment (not counting savings account) should be made in
commercial loans (NOTICE: this is a big change from the textbook example)
• The amount invested in second mortgages and personal loans combined should not be
higher than the amount invested in fırst mortgages.
• At least 5% of the total budget has to be invested in Government Securities.
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