Optimal way to divide your assets between money and bonds

Reference no: EM13189009

Suppose you recieve your entire yearly income of 3600 in the beginning of the year, and then spend it evenly over the year. Also suppose you have no other assets.
Before the income is spent, it can either be kept in money or bonds. Money yields no interest. Bonds yield a yearly interest of 4%, but a transaction fee of 18 has to be payed each time bonds are sold.
(a) Use the Baumol-Tobin model of money demand to calculate the optimal way to divide your assets between money and bonds. What is your optimal money holdings (M), as an average over the year?
(b) What is your optimal average bond holdings (B)?
(c) Suppose the interest on bonds is 9% instead. Then what is your optimal money holdings (M)?

Reference no: EM13189009

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