Question

In fall 2019, your daughter will begin a 5-year program to become a physician's assistant. She's secured scholarships and you wish to pay for the remaining costs with investments in municipal bonds. These bonds are relatively low-risk investments as well as federal and state-tax exempt. They pay annual interest at the indicated rate each year for the duration of the bond. Assume these bonds will not be recalled in the next 5 years. You can invest in 3 types of bonds. The annual interest rates and bond premiums are given below. The bond premium is paid once upon purchase of the bond. Annual Yield Bond Premium 2-year bonds 6.50% 0.10% 3-year bonds 6.55% 0.30% 4-year bonds 6.75% 1.00% The last row of the table below gives the amount you need to pay at the beginning of the next year for your daughter's schooling. Her costs for 2019 are $12,000, for 2020 are $13,000, etc. These fees must be paid at the beginning of the school year. Thus, you need to invest in bonds in Fall 2018 in order to have the money needed to pay her tuition in Fall 2019 for the 2019 school year. In hopes of future bond yields increasing, you want your total expenditures in 4-year bonds to be no more than 1/3 of your total expenditures on 2 and 3-year bonds. 'Total expenditures' means amount invested and bond premiums.

**There is no limit of amount available

	Annual Yield		Bond Premium
2-year bonds	6.50%		0.10%
3-year bonds	6.55%		0.30%
4-year bonds	6.75%		1.00%

	You will invest in Fall of these years.
	2018	2019	2020	2021	2022
Amount invested in 2-year bonds
Amount invested in 3-year bonds
Amount invested in 4-year bonds
Total Interest Received Fall of Next Year
Total $$ Needed Fall of Next Year	$12,000	$13,000	$15,000	$15,000	$10,000
Bond Premiums
Total Spent on 2 and 3-year bonds		<--- Total spent includes bond purchases and bond premiums
Total Spent on 4-year bonds
4-yr bonds as a % of 2 & 3-year bonds
TOTAL OUTLAY - BOND PREMIUMS & BOND PURCHASES

Answer 1

You will invest in Fall of these years.
	2018	2019	2020	2021	2022	2023
Amount invested in 2-year bonds	13000
Amount invested in 3-year bonds	15000	15000
Amount invested in 4-year bonds		10,000
Total Interest Received Fall of Next Year		1827.5	3485	2640	1657.5	675
Interest from 2-year bonds		845	845
Interest from 3-year bonds		982.5	1965	1965	982.5
Interest from 4-year bonds			675	675	675	675
Total $$ Needed Fall of Next Year		$12,000	$13,000	$15,000	$15,000	$10,000

Bond Premiums	2018	2019
2 year bonds	13
3 year bonds	45.00	45
4 year bonds		100
Total Bond Premium	58.00	145

Total Spent on 2 and 3 year bonds: 13000+15000+15000 =43000

Total Spent on 4 year bonds= 10000

% 4year bonds/ 2 and 3 years bonds=10000/43000 = 23.5%

Total Outlay	2018	2019
Bonds	28000	25,000
Bond Premium	58.00	145
	28058	25,145