A Portfolio Manager in Charge of a Bank Portfolio Has

question 104

Essay

A portfolio manager in charge of a bank portfolio has $10 million to invest. The securities available for purchase, as well as their respective quality ratings, maturities, and yields, are shown in the table below:

The bank places the following policy limitations on the portfolio manager's actions:
1. Government and agency bonds must total at least $4 million.
2. The average quality of the portfolio cannot exceed 1.4 on the bank's quality scale. (Note that a low number on this scale means a high-quality bond.)
3. The average years to maturity of the portfolio must not exceed 5 years.
Assuming that the objective of the portfolio manager is to maximize after-tax earnings and that the tax rate is 50%, formulate a linear program that can be used to determine how much money to invest in each type of bond.

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Definitions:

Cash Flow

The net amount of cash and cash equivalents being transferred into and out of a business.

Par Value

The face value of a bond, stock, or coupon as stated by the issuer, which is the minimum amount at which the security can be sold.

Preferred Stock

A class of ownership in a corporation with a higher claim on assets and earnings than common stock, typically with dividends that are paid out before dividends to common shareholders.

No-par Common Stock

No-par common stock is issued without a par value, and its value is determined by what investors are willing to pay for it, rather than being stated in the company's charter.