1) Calculate the price of each bond in Part IV, using level debt service bond pricing. Assume the market rate of 2.5%. 2) Calculate the economic order quantity (EOQ) and ordering frequency (OF) for the water filters ($12.79 each), if the cost of placing an order is $5 and carrying costs are 10%. Annual usage is estimated at 1500 units. 3) Dr. Rubin plans to invest $10,000 annually for three years. Two banks offer a 3 percent interest rate, but Bank A compounds quarterly and Bank B compounds semiannually. To what value would his money grow in each of the two banks? Which bank would you recommend?
Part IV.
Peter Clemenza and Luca Brasi are arguing about the following bonds. Both bonds are for 5 years, each with the par value of $100,000. The coupon rates are compounded semi-annually. The coupon rate for bond #1 (favored by Mr. Clemenza) equals 1.8% and is tax free. The coupon rate for bond #2 (favored by Mr. Brasi) equals 2.6%, but it is subject to both federal and state taxes. The combination of federal and state taxes on this type of bonds usually average to about 30%. Peter Clemenza argues that since one does not have to pay taxes on bond #1, then it is a better investment. Luca Brasi says the bond #2 is a good investment, because it will earn higher return than the bond #1. Can you settle their argument? Which bond would you recommend?