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A has $20,000.00. He/she has two options to make his/her  Question banks Downloads My Bookmarks Reviews Important topics Author Message TAGS: VP Joined: 25 Nov 2004 Posts: 1494 Followers: 6 Kudos [?]: 40 [0], given: 0 A has$20,000.00. He/she has two options to make his/her [#permalink]  26 Feb 2005, 17:22
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A has $20,000.00. He/she has two options to make his/her investment: Bond X offers 10% annual coupon intrate rate and Bond Y offers 15% annual coupon interest rate. A plans to make an annual income of$4500, how much should he invest in X and Y?

Last edited by MA on 26 Feb 2005, 22:10, edited 1 time in total.
VP
Joined: 18 Nov 2004
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Is he supposed to invest both X and Y and also I am assuming it is simple interest ?
GMAT Club Legend
Joined: 15 Dec 2003
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Logically, if you put all into Y@15%, you would make only 3k. Hence, you have to short sell X and leverage Y. This is assuming that he needs to make 4.5k over 1 year

.1X + .15[20,000 - X] = 4,500
X = -30,000
and Y = 50,000

Short 30k of X and buy 50k of Y
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Best Regards,

Paul

VP
Joined: 25 Nov 2004
Posts: 1494
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Kudos [?]: 40 [0], given: 0

Paul wrote:
Logically, if you put all into Y@15%, you would make only 3k. Hence, you have to short sell X and leverage Y. This is assuming that he needs to make 4.5k over 1 year
.1X + .15[20,000 - X] = 4,500
X = -30,000 and Y = 50,000. Short 30k of X and buy 50k of Y

undoubtly excellent............. but prefer borrowing rather than short sell because short sell is for a very short period of time and borrowing can be done for any period of time.
Manager
Joined: 13 Oct 2004
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I think the problem is easier if the answer choices are given, you just backsolve?.
Manager
Joined: 01 Feb 2005
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In order to be able to sell something, first of all one needs to own that. We know that A has $20K, how do we know that he owns Bond X to sell it? I think it should be stated in the question and not assumed. GMAT Club Legend Joined: 15 Dec 2003 Posts: 4309 Followers: 29 Kudos [?]: 235 [0], given: 0 [#permalink] 26 Feb 2005, 19:07 Marina wrote: In order to be able to sell something, first of all one needs to own that. We know that A has$20K, how do we know that he owns Bond X to sell it? I think it should be stated in the question and not assumed.

I agree with you. I think this is one of those finance concepts whereby one can "short sell" a securities one does not own. Since we are not talking about "borrowing" liquidity against a bank, I would still prefer the term "short selling", which can happen over a long time frame, although there is an inherent risk of having the instrument being "called" by the owner
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Best Regards,

Paul

VP
Joined: 25 Nov 2004
Posts: 1494
Followers: 6

Kudos [?]: 40 [0], given: 0

Paul wrote:
Marina wrote:
In order to be able to sell something, first of all one needs to own that. We know that A has $20K, how do we know that he owns Bond X to sell it? I think it should be stated in the question and not assumed. I agree with you. I think this is one of those finance concepts whereby one can "short sell" a securities one does not own. Since we are not talking about "borrowing" liquidity against a bank, I would still prefer the term "short selling", which can happen over a long time frame, although there is an inherent risk of having the instrument being "called" by the owner why i prefer borrowing is that in short selling the return doesnot belong to you while in borrowing the return belong to you. to have short sell, you do not need to own something and to borrow aslo you do not need to own the assets to the extent of borrowing amts. these concepts are totally practical in real life. SVP Joined: 03 Jan 2005 Posts: 2246 Followers: 13 Kudos [?]: 226 [0], given: 0 [#permalink] 26 Feb 2005, 21:45 A good question (excellent explanation Paul), but not GMAT type, in my opinion. (It didn't specify A has to get 45k in one year, also didn't say that he has the option to sell short.) VP Joined: 25 Nov 2004 Posts: 1494 Followers: 6 Kudos [?]: 40 [0], given: 0 [#permalink] 26 Feb 2005, 22:09 HongHu wrote: A good question (excellent explanation Paul), but not GMAT type, in my opinion. (It didn't specify A has to get 45k in one year, also didn't say that he has the option to sell short.) Yes, it is basically a finance concept (finance is my most favorite subject) and we need this concept to solve this problem. in perfectly competitive market, lending and borrowing are readily available. Alright, i am editing the question as A plans to make$4500 in one year. i agree with the notion that the GMAT question should be clear, if it is problem solving.
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