It is January 1, 2005. Director of Special Projects Rakesh Parameshwar has a planned $20.5 million project, which will require the following expected cash flows between 2005 and 2009:

Date	Cash Requirement ($ millions)
01-Jun-05	7.50
01-Jan-06	4.50
01-Jun-06	1.00
01-Jan-07	1.00
01-Jun-07	1.00
01-Jan-08	1.00
01-Jun-08	1.00
01-Jan-09	3.50

Rakesh turns to his Director of Financial Planning, Christine Reyling, and asks her to ensure that funding is available for the project. Christine is considering buying a portfolio of bonds, with cash flows from the bonds arranged to coincide with the needs of Rakesh’s project. The following bonds are available, and can be purchased in any quantity:

Maturity	01-Jun-05	01-Jan-06	01-Jun-06	01-Jan-07	01-Jun-07	01-Jan-08	01-Jun-08	01-Jan-09
Coupon	7.00%	7.50%	6.75%	0.00%	10.00%	9.00%	10.25%	10.00%
Price	1.00	1.03	1.02	0.81	1.16	1.15	1.23	1.25

1. 
   
2. a). What is the minimum cost portfolio of these bonds that will meet the project’s requirements? Assume that any cash can be reinvested at an annual rate of 4%, and don’t worry about discounting.
3. b). What is the cost of capital over time for this project? In other words, if Rakesh decides he will need an additional dollar in June of 2007, what is the present value of that dollar?
4. c). What is this present value for all relevant periods for the duration of the project?
5. d). What is the implied “yield” for each of these periods? For example, if Rakesh needs an additional $1 million in June of 2007 and you conclude that the present value of this $1 million is $0.739 million, what is the implied rate of return on this $0.739 million that will be worth $1 million in June of 2007?

Answer rating: 100% (QA)

A The minimum investment required to purchase a single bond is about 1000 though bonds are generally sold in 5000 increments Bonds can be purchased from several sources including investment and commer... View the full answer