Consider the bond-portfolio problem formulated in Section 1.3. Reformulate the problem restricting the bonds available only to bonds A and D. Further add a constraint that the holdings of municipal bonds must be less than or equal to $3 million.
a) What is the optimal solution?
b) What is the shadow price on the municipal limit?
c) How much can the municipal limit be relaxed before it becomes a nonbinding constraint?
d) Below what interest rate is it favorable to borrow funds to increase the overall size of the portfolio? e) Why is this rate less than the earnings rate on the portfolio as a whole?