By Terry Savage on May 13, 2013 | Wild Card

You saved $20,000.00 and want to diversify your monies. You invest 45% in a Treasury bond for 3 years at 4.35% APR compounded annually. You place 15% in a CD at 3.75% APR for 3 years compounded annually. 20% you invest in a stock plan and the remainder is in a savings account at 2.90% APR compounded annually. The stock plan increases 8% the first year, decreases in value by 4% the second year, and increases by 6% the third year. 1. What are the balances for each type of investment at the end of the third year?
2. What is your total gain from all of the investments combined?
3. If you had invested 45% in stock and 20% in Treasury bonds, would you have more or less of a gain after the three years?

SAVAGE SAYS: Well, I won’t comment on the math — but?consider the following?errors.

First, there is NO WAY you could earn 4.35% on a Treasury today. And if you did have the correct current rate (currently about 2%) you should know that Treasuries don’t “compound” — You get the interest payments, and then you must reinvest them at the current rate. (OK, you could buy a zero coupon Treasury, and then you wouldn’t have the reinvestment problem — but you would have a tax on the imputed interest unless you put the investment inside an IRA.)

Second, you can’t get a 3 year CD at 3.75 percent, or a 2.9% yield on a savings account — not these days!

So next time your teacher assigns you a math problem, please advise him/her to make it more realistic. Then YOU do the math!




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