CCMS ACTIVITY 

April 6, 2022 

1. Rakesh Sharma is a financial analyst for Retirement Planning Services Inc. who specializes in
designing retirement income portfolios for retirees using corporate bonds. He has just
completed a consultation with a client who exceeds to have P5,000,000 in liquid assets to invest
when she retires next month. Rakesh and his client agreed to consider upcoming bond issues
from the following six companies: 

Company Return Years to Maturity Rating

Acme Chemical 8.65% 11 Excellent – 1
ABC Corp 9.5% 10 Good – 3
Amar Visions 10.00% 6 Fair – 4
Jindal Worldwide 8.75% 10 Excellent – 1
B Telefilm 9.25% 7 Good -3
Lux International 9.00% 13 Very Good-2

The label column labeled "return" in this table represents the expected annual yield on each bond, the
column labeled " years to maturity" indicates the length of time over which the bonds will be payable,
and the column labeled "rating" indicates an independent underwriter’s assessment of the quality or
risk associated with each issue. 

Rakesh believes that all of the companies are relatively safe investments. However, to protect his client's
income, Rakesh and his client agreed that: 

• No more than 25% of her money should be invested in any one investment and

• At least half of her money should be invested in long-term bonds that mature in ten or more years. 

• Also, even though ABC Corp, Amar Visions and B Telefilm offer the highest returns, it was agreed that
no more than 35% of the money should be invested in these bonds because they also represent the
highest risks (i.e., they were rated lower than "very good"). 

Determine how to allocate the investments to maximize the income while meeting investment
restrictions. 
 Total money No more 35% or less
to invest than 25% in in higher
any one risk
company companies
and at least (Good or
½ in long Worse)
term
companies
(10 years or
more)

2. You have $12,000 to invest, and three different funds from which to choose. The municipal bond
fund has a 7% return, the local bank's CDs have an 8% return, and the high-risk account has an
expected (hoped for) 12% return. To minimize the risk, you decide not to invest any more than
$2,000 in the high-risk account. For tax reasons, you need to invest at least three times as much
in the municipal bonds as in the CDs. Assuming the year-end yields are as expected what are the
optimal investment amounts.

x: amount invested in bonds

y: amount invested in CDs

12-(x+y): amount invested in high-risk accounts

Maximize Y = 1.44 – 0.05x – 0.04y, subject to:

  x > 0
  y > 0
  y > –x + 10
  y < –x + 12
  y < (1/3) x
The feasibility region graphs as:

I=.07x+.08y+.12(12-x-y)

I=-0.05x-0.04y+1.144

Solution to Investment Problem

(10,0) (12,0) (9,3) (7.4,2,5)

-0.05(10) + 1.44 = 0.94 -0.05(12) + 1.44 = 0.84 -0.05(9)-0.004 +1.44 -0.05(7.5)-0.04(2.5)
= $940 = $840 = 0.87 +1.44 = 0.87
= $870 = $965

The optimal investment would be to invest $7500 in bonds and $2500 in CDs, with the remaining $2000
in high-risk accounts for a return of $965