Problem: You need to develop a multi-period model that recommends bond purchases to minimise costs while providing a specified cash flow.
This multi-period problem is an example of
dynamic modeling. "Dynamic" means that decisions made in this period affect not
only this period's returns (or costs), but future decisions and returns as well. For this
reason, multi-period problems cannot be treated as if they were merely a collection of
You're a financial adviser for an investment firm. Your client needs enough cash to cover
commitments for the next five years. You've concluded that to meet these financial
obligations, he should invest in some very low-risk securities such as government bonds.
You must recommend bonds to buy to minimise his total cost now, yet cover his cash flow
requirements. This is also an example of how to defease debt - how to wipe it off the
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