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Homework Assignment #2: Columbia Business School

1) MoneyCo can generate $1,432,000 by investing $500,000 each in bonds A and D in year 1, and the remaining $500,000 in CDs each year. 2) As the CD rate increases, investment in CDs decreases until it reaches 10%, at which point no money is invested in CDs. Investment in bonds decreases to 0 as the CD rate reaches 18%. 3) With the constraint of investing in no more than 3 bonds, MoneyCo can generate $1,412,000 by investing $500,000 each in bonds A, B, and D in year 1, and the remaining $500,000 in CDs each

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45 views

Homework Assignment #2: Columbia Business School

1) MoneyCo can generate $1,432,000 by investing $500,000 each in bonds A and D in year 1, and the remaining $500,000 in CDs each year. 2) As the CD rate increases, investment in CDs decreases until it reaches 10%, at which point no money is invested in CDs. Investment in bonds decreases to 0 as the CD rate reaches 18%. 3) With the constraint of investing in no more than 3 bonds, MoneyCo can generate $1,412,000 by investing $500,000 each in bonds A, B, and D in year 1, and the remaining $500,000 in CDs each

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JDesconectado18
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© © All Rights Reserved
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COLUMBIA

BUSINESS
SCHOOL
B6015: Decision Models
Summer 2000

Homework Assignment #2
This assignment is an individual assignment. Formulate the problems below, and answer
the questions. Follow the instructions from Assignment #1 on how to write-up the solution. That
is, be sure to hand in a write-up in English that gives the answers to each part of each question,
along with printouts of your spreadsheets with formulas given.

Assignment

1. MoneyCo has $1,000,000 available to invest in the beginning of year 1. There are five bonds
A, B, C, D, and E, that the company is considering investing in, and the cash flows for each
of these bonds over the next four years is given in the table below. (Assume all transactions
occur on the first day of the year and today is the first day of year 1.) For example, every
dollar invested in A in year 1 yields $1.40 at the beginning of year 4. In addition to these
bonds, MoneyCo can invest as much money each year as it wants in CDs. CDs pay a 5%
annual interest rate. Assume it can put no more than $500,000 in any one bond (the amount
in CDs in unlimited). Assume bonds can be bought in any fractional amount.

A B C D E
Year 1 -1.00 -1.00 -1.00
Year 2 +1.15 -1.00
Year 3 +1.28 -1.00
Year 4 +1.40 +1.15 +1.32

a) Formulate a linear decision model to help MoneyCo maximize its available cash at the
beginning of year 4. How much money can MoneyCo generate? Explain how
MoneyCo can achieve this (how many bonds are bought, at what time, and how much is
put into CDs in each year).
b) MoneyCo would like to consider the effect of the CD rate on the cash they can
generate. Solve the problem for different CD rates ranging from 0% to 20% in
increments of 2%. (You may use SolverTable for this). Explain for what values of CD
rates is no cash invested in CDs and for what values of CD rates is no cash invested in
any of the bonds.
c) Assume that you cannot invest in more than three different bonds. How does the model
change? What is the new answer?

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