Mr.Pierpont has wealth of $200,000.He wants to keep at least $80,000 in bonds at all times,and will shift $10,000 into bonds from his checking account for each percentage point that the interest rate on bonds exceeds the interest rate on his checking account.Currently,he keeps $100,000 in bonds,which pay him 7%.What is the current interest rate on checking accounts?

Question

Quizplus · Accepted Answer

Mr. Pierpont currently has $100,000 in bonds, which is $20,000 more than his minimum requirement of $80,000. Since he shifts $10,000 into bonds for each percentage point the bond interest rate exceeds his checking account rate, and he has shifted $20,000 extra, this indicates the bond rate is 2% higher than the checking account rate. Given the bond rate is 7%, the checking account rate must be 5%.

MrPierpont Has Wealth of $200,000